Hong Kong stocks catch wave of uncertainty

City is vulnerable to worsening ties between China and the US and usually does badly during a period of risk-off sentiment

Hong Kong shares have dropped as economic fallout from unrest takes hold. EPA

Hong Kong stocks fell as the city reacted to the latest wave of declines across the globe.

The Hang Seng Index was down 1.5 per cent as of 1:47pm local time, while a gauge tracking Chinese companies also declined 1.5 per cent. The city’s equity market, which was shut Monday for a holiday, had been relatively resilient to this month’s rapid correction onshore and worsening trade relations between the US and China. The Hang Seng benchmark is now down 5.3 per cent for May. China’s CSI 300 Index, which was little changed Tuesday afternoon, has lost 6.3 per cent this month.

Beijing retaliated late Monday with higher tariffs on a range of American goods, spurring a 2.4 per cent loss in the S&P 500 Index. As a global financial centre with no limits on capital flows, Hong Kong is vulnerable to worsening ties between the two nations and usually does badly during a wave of risk-off sentiment. A weak yuan also weighs on earnings for Chinese heavyweights listed in the city.

Softening the impact on Tuesday were comments from US President Donald Trump that he thinks talks with China will be “very successful”. The offshore yuan strengthened to 6.8936 per dollar after weakening past 6.9 per dollar for the first time this year on Monday.

“Investors are not yet in panic mode, since there’s still room for an agreement on trade,” said Steven Leung, a Hong Kong-based executive director at Uob Kay Hian (Hong Kong). “The uncertainty is enough to keep investors nervous. Hong Kong is catching up.”

A slump in China’s currency tends to weigh on Hong Kong’s equities. Morgan Stanley last year estimated that members of the Hang Seng Index generate about 60 per cent of their earnings in yuan. The offshore rate had weakened for six straight days through Monday, taking its decline in May to about 2.4 per cent against the dollar.

The Hong Kong benchmark fell below its 100-day moving average on Tuesday, which served as a support for the gauge in the past two years. Failure to stay above the key level over the next few days could fuel more sell-offs, according to Uob Kay Hian’s Leung.

Short selling turnover in Hong Kong’s main board has been increasing since early May. It accounted for about 15 per cent of total turnover in the city on Friday, the highest in more than two weeks.

The Hang Seng gauge is showing its strongest downward momentum since a sell-off in October, according to a technical indicator known as the directional movement index.

Another momentum indicator also points to further declines in Hong Kong. The moving average convergence divergence line - which in April triggered a bearish signal - fell even further last week to turn negative. It has also started to decouple from the Hang Seng Index, a pattern known as a “bearish divergence”.