Players weigh up negatives

Hong Kong stocks appear set to trend higher in the coming days. Although there is a growing fear interest rates will be pushed higher, shares have come off so far in recent weeks that the impact of another tightening may already be reflected in prices.

The rise could be built on the Dow's surprise gain on Friday. Wall Street's lead indicator overturned a 72-point loss sparked by the latest set of US price and employment data that suggested inflationary pressures may be gathering force.

Howard Gorges, vice-chairman at South China Brokerage, said: 'The markets are a bit ahead of the game. [Friday's Hong Kong] rally looks like continuing as the market has discounted pretty heavily already . . . We could get back to 12,600.' In the week's final session, the Hang Seng Index rose 149.42 points to 12,204.59 in a conglomerate-led surge, albeit in relatively modest volume. Over the week, the index, which has lost about 1,350 points in the past two months, dropped 2.63 per cent.

Looking ahead, brokers said there was strong support at 12,000 points. The upside was put 400 to 600 points higher.

The US economic data, released after the territory's market closed on Friday, suggested that inflation might be a growing threat.

While the employment numbers came in below consensus forecasts - 175,000 non-farm jobs were added last month compared with most predictions of about 200,000 - the wages figures were more worrying.

Average hourly earnings were growing at an annualised rate of 4 per cent, their fastest pace in six years. While some of that growth reflected increases in worker productivity - and was therefore non-inflationary - it also stemmed from a tightening of the labour market.

The United States' balancing act of sustained expansion with subdued inflation may be coming to an end. Similar scares in the opening months of 1994 and 1996 faded and the bull market remained intact. Friday's package of figures sent bond yields sharply higher. The US long bond added seven basis points to yield 7.13 per cent, its highest level since September last year.

The equity markets kept their nerve. After falling when the numbers were revealed, both New York and London rallied to end in positive territory. Despite the late surge, it was the Dow's worst week since June 1994.

'The unemployment numbers weren't too scary,' Mr Gorges said.

In the territory, many blue chips are at their cheapest levels in six months as investors have priced in the impact of higher interest rates.

The US Federal Reserve added 0.25 percentage point to the target rate for overnight loans between banks on March 25. Many brokers expect another rise when the Federal Open Market Committee meets on May 20.

Bargain-hunts took the 33-stock Hang Seng Index higher on two days last week.

Banks and conglomerates are seen as having the greatest upside potential in the days ahead. Properties have yet to shake off the impact of the Government's recent moves to clamp down on speculation.