The Hang Seng Index has experienced a significant downturn, bringing its impressive four-day winning streak to an abrupt halt. This reversal in sentiment is mainly attributable to a broad tech sector sell-off and brewing deflationary concerns in mainland China. The tech sell-off, led by weak earnings from Chinese chipmaker Semiconductor Manufacturing International Co. (SMIC), whose shares plunged by 5%, has cast a pall over the broader tech sector. This, coupled with the looming deflationary risks, has led to a decline in the Index. With investors now grappling with a mix of corporate earnings disappointments and crucial economic data releases, the Index finds itself at a pivotal point.
The benchmark Hong Kong index declined by 0.56% to 24,941 in morning trading on Friday, August 8. This negative momentum was heavily driven by weak earnings from Chinese chipmaker Semiconductor Manufacturing International Co. (SMIC), whose shares plunged by 5%. This specific corporate disappointment cast a pall over the broader tech sector, demonstrating the market's sensitivity to profitability in the face of ongoing economic headwinds. In contrast, mainland China's CSI 300 and Shanghai Composite indices managed marginal gains of 0.06% and 0.03%, respectively, suggesting a divergence in sentiment between Hong Kong and the mainland.
The market's cautious tone intensified ahead of Saturday's crucial Chinese inflation and producer price data. These releases are of utmost importance as they will provide key insights into the current economic conditions. Economists are forecasting consumer prices to fall by 0.1% year-on-year in July, following a marginal rise of 0.1% in June, while producer prices are expected to decline by 3.3% year-on-year. Should these forecasts be realised, it would signify a concerning intensification of deflationary pressures. Such a backdrop, coupled with fierce market competition, could further erode corporate profit margins and subsequently impact share prices across the board.
For a detailed view of these upcoming releases, consult a reliable Economic Calendar.
Despite the recent sell-off, there's a glimmer of hope in the form of a potential US-China trade deal and fresh stimulus from Beijing. These factors could potentially provide a floor for the Hang Seng Index. However, uncertainties persist, particularly regarding US tariffs on transhipments—a move that analysts view as a tactic to counter China's efforts to bypass levies. This fragile state of trade relations underscores a crucial dynamic that continues to keep the Hang Seng from re-testing its July 24 high of 25,736.
From a technical perspective, the Hang Seng Index, despite Friday's losses, has thus far maintained a bullish bias. The Index remains positioned above both its July congestion zone, a period of consolidation or range-bound trading, and the 50-day Exponential Moving Average (EMA), a technical indicator that smooths out price data to identify trends, signifying that the underlying upward momentum has not been fundamentally broken.
Hang Seng Index Daily Chart showing key support and resistance levels. (Data source: TradingView)
The near-term outlook for the Hang Seng Index is a complex interplay of competing forces. While bullish sentiment may find renewed strength from a favourable US-China trade deal and Beijing's policy support, the ongoing risks from corporate earnings and deflationary pressures cannot be ignored. The Index's direction in the coming weeks will ultimately be determined by which of these narratives gains traction.
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