The Hang Seng index is unraveling. It has been in the red for three straight weeks and dropped by 9.8% from its highest point this year. This signals that it is nearing a correction level even as its European counterparts like the DAX and CAC 40 index near their all-time highs. The HSI 50 index was trading at $20,680 on Tuesday.
The Hang Seng, which is the S&P 500 equivalent of Hong Kong, has suffered a harsh reversal in the past few weeks. This decline has not been caused by anything in particular. Instead, it is a reflection that the Chinese economy will not expand as fast as analysts were expecting. These expectations pushed the index up by over 55% from its lowest level in December to the highest point this year.Hang Seng chart by TradingView
A likely reason for the HSI underperformance is the overall view that the Chinese economy will not recover as fast as expected. Recent data is providing more color about this. For example, the price of thermal coal has crashed to a one-year low in China, signaling that industries are not doing well. In a recent note, an analyst at Nomura said:
“The mixed data send a clear message that markets should not be too bullish about growth this year. This pattern has rich implications for different asset classes and commodity types, so closely tracking these high-frequency data is warranted.”
The main catalyst for the Hang Seng index is corporate earnings. On Tuesday, HSBC became the first major constituent to publish its results. As I predicted in this report, HSBC had a strong quarter. Its profit before tax for the final three months of the year came in at $5.2 billion, which was about 108% above what it made in 2022. Its revenue surged to $51 billion in 2022.
The other key Hang Seng constituent that will publish its results is Alibaba, one of the biggest companies in China. These results will come on the same week that American retail companies like Walmart and Target will publish their results. Analysts believe that the company continued showing strength in Q4 as it took advantage of the holiday season. Alibaba stock price has crashed by ~17% from its highest point this year.
Baidu, which is seen as China’s Google, will also publish its financial results this year. Unlike Alibaba, the Baidu stock price has jumped this year because of its AI investments.
In my article on the Hang Seng last week, I noted that the index will continue rebalancing in the near term and then rebound. If this happens, the index could crash to about $20,000 before recovering.
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