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Why Hang Seng Index Jumps Near 3% Today?

The weekend news from Buenos Aires Argentina was slightly better than expected. Risk appetite returns to markets on 3 Dec, as both Hang Seng Index and Shanghai Composite Index jump closed to 3% and Chinese yuan rises over 400 basis points or 0.6%. The Chinese yuan and Hang Seng Index have been positively correlated in the past 6 months (Hang Seng Index and Chinese yuan rise and drop in the same direction).

Presidents Xi Jinping and Donald Trump promised to halt any new tariffs for 90 days as China and the US continue negotiations. The U.S. had been scheduled to push ahead on Jan 1 with increased tariffs on $200 billion worth of Chinese goods. The news offers some relief for Hong Kong and China stock markets, which have tumbled over 20% this year.

The White House also said Beijing had agreed to buy “very substantial” amount of agricultural, energy, industrial and other products. However, the White House said the existing 10 percent tariffs on $200 billion worth of Chinese goods would be lifted to 25 percent if no deal was reached within 90 days.

Interestingly, China praised the “important consensus” reached in the deal but did not mention the 90-day deadline in the state-run media. Despite the differences in the wording and uncertainty about some details, the agreement was a better outcome than investors had expected.

We believe nerves will persist after the 90 days break as the ideology behind the trade tensions is still about strategic positioning of the two economies, which means until issues around technology transfer and IP are resolved. Moreover, China is also facing domestic issues including slowing growth, and awaiting more information about the direction of macroeconomic policy.

China’s factory activity grew slightly in November, a private survey Caixin manufacturing PMI just announed today is up 50.2 vs forecast 50.1. A slower pace of rate hikes signaled from the Fed Chairman Powell earlier also improves market sentiment.

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Disclosure: Hayes Chan, CFA, is The Motley Fool Hong Kong’s investment analyst. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.