Hong Kong's Squeezed Money Market Sends a Sell Signal on Stocks
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"Even with two expected U.S. rate hikes next year, the rate gap with Hong Kong won’t be wide enough to spur significant outflows," said Thomas Shik, acting chief economist at Hang Seng Bank Ltd. Investors also like Hong Kong because of its currency peg with the strong greenback and Asia’s higher growth potential, he added.
There are money market concerns on both sides of the Hong Kong-mainland border. The Shanghai Composite Index retreated the most in six months on Monday as concern about dwindling liquidity was exacerbated by a regulatory crackdown to insurers’ stock investments and Donald Trump’s remarks about the U.S.- China trade relationship.
Currency weakness, along with concern mainland assets are overpriced, has driven Chinese investors to put their cash in Hong Kong equities and homes. China is now stepping up restrictions on outflows to defend the yuan, including tightening curbs on its citizens buying insurance in Hong Kong.
The city has also raised its stamp duty to rein in its world- topping home prices. “Inflows from China may slow because of recent measures," said Steven Leung, Hong Kong-based executive director at UOB Kay Hian. "Hong Kong hasn’t seen outflow pressure, but next year it will be more obvious."
HIBOR rates has been depressed for a long time but are rising in line with LIBOR as the island’s peg with the US Dollar will force an interest rate hike next week. That will represent a change for the property market which has soared as a leveraged bet on easy Fed monetary policy.
The Hang Seng Property & Construction Index has been ranging in a volatile manner since 2009 and is currently struggling to hold the 3000 level. A clear upward dynamic will be required to question potential for lower to lateral ranging.
The Hong Kong China Enterprises Index (H-Shares) pulled back from the psychological 10000 level again today and will need to hold the region of the most recent higher reaction low above 9000 if potential for additional higher to lateral ranging is to be given the benefit of the doubt.
