The Hang Seng index suffered a harsh reversal on Tuesday after the World Bank issued a major warning about the Chinese economy. The index, which tracks the biggest companies in Hong Kong and Mainland China, slipped by over 9% to H$20,760, its lowest point since September 27.
Hong Kong shares sink
The Hang Seng index dived sharply after the World Bank predicted that the Chinese economy would struggle to hit the 5% target this year despite Beijing’s unveiled stimulus packages.
The decline happened even as other mainland indices surged. Data by Investing.com shows that the Shanghai and Shenzhen composite jumped by over 5% and 7%, respectively.
This price action happened as investors remained hopeful that Beijing would unveil more stimulus in the coming days.
Chinese leaders will likely provide more information about potential stimulus in a meeting on Tuesday.
This meeting comes less than two weeks after China’s politburo concluded, with officials agreeing on the need for more stimulus. While details remain scarce, analysts estimate that the proposal at the time would be over $150 billion.
The People’s Bank of China (PBoC) also provided a stimulus package worth over $100 billion. It did that by reducing banks’ reserve requirements. Some of the unlocked funds will go to buy Chinese stocks and promote share buybacks.
Therefore, the Hang Seng index likely plunged for two main reasons. First, the decline happened as many investors moved from Hong Kong stocks to Mainland ones. That’s because Hong Kong markets were open for the most of last week while Mainland ones were closed.
Second, the decline mirrors the crash of American equities on Monday. The Dow Jones index declined by 400 points, while the Nasdaq 100 and S&P 500 indices slipped by 235 and 55 points, respectively.
US equities plunged as signs emerged that the Federal Reserve will not cut interest rates as expected. The Bureau of Labor Statistics (BLS) published strong jobs numbers last week, with the unemployment rate falling to 4.2% and the nonfarm payrolls rising by over 254k.
Second, there are significant geopolitical tensions in the Middle East as Israel considers its response to Iran. Israel could consider bombing Iran’s military bases, oil and gas terminals, or nuclear plants, risking a significant war in the region.
Most global stocks will be impacted by this conflict mostly because of higher crude oil prices. Brent, the global benchmark, rose to $80 for the first time in months. West Texas Intermediate (WTI) rose to $77 on Monday. The two then pulled back on Tuesday, falling to $79 and $75, respectively.
Read more: Why China’s latest monetary stimulus might fall short of reviving its sluggish economy
Top Hang Seng laggards
Most Hong Kong stocks were in the red on Tuesday. Longfor Properties stock price dived by over 20% as concerns about the real estate sector continued. It dropped to a low of H$12.15, down by over 40% from its lowest level this month.
A likely reason for this plunge is that Chinese stimulus will not save the real estate sector. Last month, the developer said that revenue in the core property development business dropped by 32% to 33 billion yuan.
China Resources Mixc Lifestyle Services also suffered a harsh reversal, falling by over 16% to a low of $31.85. Like Longfor, it has dropped by 20% from its highest level this month, entering a technical bear market.
China Life Insurance and Mengniu Dairy were the other top laggards on Tuesday, falling by over 15%. Technology companies like Alibaba Health Information and Jd Health shares tumbled by over 13%.
The best-performing Hang Seng companies were also in the red. CK Hutchison shares tumbled by 2.51%, while CLP Holdings, HK & China Gas, HSBC, and Power Assets fell by over 2%.
Geopolitics and the upcoming top events from the United States will be the next key catalysts for the Hang Seng index. On Wednesday, the Federal Reserve will publish the minutes of the last monetary policy meeting, while the statistics agency will publish the latest Consumer Price Index (CPI) data.
Hang Seng index analysis
The daily chart shows that the Hang Seng index went vertical, rising from a low of H$14,812 in January to a high of H$23,235 on Monday. The recently launched stimulus by Beijing authorities mostly drove this rebound.
It has now suffered a harsh reversal, falling to a low of H$20,760. This decline happened after it formed a shooting star candlestick pattern, a popular reversal sign.
The index has remained above the 50-day and 200-day Exponential Moving Averages (EMA). It also dropped below the key support level at $22,690, its highest swing in January 2023. Also, it formed a bearish engulfing pattern.
Therefore, the index will likely remain under pressure in the near term. More upside will mostly be confirmed if the index rises above the key resistance level at H$23,233, its highest point this year.
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