Hang Seng Index crash: There is an ill wind blowing

The Hang Seng index sell-off gained steam on Tuesday as fears of a global contagion spread. The closely watched index of Hong Kong blue chip companies, plunged by almost 2% and crossed a key support level. 

Hong Kong stocks retreat

Asian investors were spooked by last week’s collapse of Silicon Valley Bank and Signature Bank in the United States. As a result, most indices in the region were in the red on Tuesday. For example, the Nikkei 225 index fell by over 2% while the Shanghai index and China A50 fell by over 1.50%.

Most financial services companies in Hong Kong were deeply in the red on Tuesday. HSBC share price crashed by more than 5%, becoming the worst performer in the index. The stock dropped after the company decided to buy Silicon Valley Bank’s UK division in a £1 deal.

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It will now need to inject billions of pounds in the company in the immediate term. Also, as we saw after the takeover of Merril Lynch, the company will likely be forced to pay millions or even billions by regulators for its role in the crisis. 

Other Hang Seng banks like Bank of China and Hang Seng Bank were also deeply in the red. They all fell by more than 2%. There are fears that more bank runs will happen in the coming weeks. 

Unlike in the Nikkei 225 index, losses in the Hang Seng were broadly spread across multiple sectors. Real estate company Longfor Properties was the second worst-performing stock in the index as it fell by over 4.48%. Xinyi Glass, Geely Automobile, Country Garden Services, and Country Garden Holdings were among the top laggards. 

There is a positive during all this, which partly explains why American futures turned positive. The situation in the banking sector means that the Fed will be inclined to pause its rate hikes going forward. This will happen as the bank prioritizes economic health instead of inflation. 

Hang Seng Index forecast 

HSI chart by TradingView 

The daily chart shows that the Hang Seng Index has been in a strong bearish trend in the past few weeks. This sell-off started when the index rose to a high of H$ 22,690 on January 27th. The index has crossed the 50-day and 100-day exponential moving averages (EMA). 

Most importantly, the index has moved slightly below its lowest point on May 11 and March 9 while the Relative Strength Index (RSI) has continued moving downwards. Therefore, the outlook for the index is bearish, which is in line with my previous forecast, where I warned that it was entering a period of stable disequilibrium.

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