Stocks Drop in Hong Kong as Trade War Trumps Upbeat PMI Data

2019-12-04 02:00:00 Ilya Spivak, Head Strategist, APAC

HANG SENG INDEX, TRADE WAR, CHINA PMI – Talking Points:

Hang Seng Index (HSI) down as trade war escalation triggers risk aversion
Upbeat Caixin Chinese PMI surveys unable to countervail selling pressure
Technical breakdown may set the stage to challenge 13-month range floor

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Another batch of better-than-expected Chinese data was not enough to keep stocks in Hong Kong afloat. Caixin PMI data showed service-sector growth accelerated more than economists expected in November, registering at the fastest clip in six months. Taken together with a rosy manufacturing PMI print earlier in the week, this amounted the best overall performance since February.

Nevertheless, the Hang Seng Index (HSI, magenta line on the chart below) has suffered as trade war escalation cooled risk appetite. Futures tracking the Hong Kong stocks benchmark sank with the bellwether S&P 500 index (turquoise line) and US 10-year Treasury yields (orange line). The priced-in 2020 policy path implied in Fed Funds futures (white line) shifted lower in tandem, implying a dovish reappraisal.

Chang of Hang Seng Index falling with S&P 500, 10-year Treasury yields and the Fed policy outlook

Hang Seng Index chart created with TradingView

Further weakness may be in the cards. HSI is on course to break counter-trend support guiding its upswing from mid-August lows. Confirmation on a daily closing basis would suggest a correction has run its course and the dominant decline launched in mid-April has resumed. Initial support follows at 25507. The true test of sellers’ mettle may be the 24457-876 zone however. They have not managed to break it in over a year.