Hong Kong’s Hang Seng index is soaring but risks remain

The Hang Seng index rebound gained steam on Monday, helped by the mixed US data and the rebounding Country Garden share price The index, which tracks the biggest companies listed in Hong Kong, jumped by more than 2.35% and reached the highest level since August 11.

Country Garden share price rebounds

The Hang Seng index rallied sharply after a piece of good news from Country Garden, the embattled real estate developer. The firm’s creditors agreed to restructure its renminbi bond due last Saturday. As a result, its stock soared by more than 20%.

Still, the company is not out of the woods yet, as I wrote here. Country Garden has almost $200 billion in liabilities and has struggled to pay back its dollar bonds. Its looming collapse will likely lead many customers to pause their payments.

Real estate companies were the best-performing constituents in the Hang Seng index. Longfor Properties, China Resources Land, and China Resources Mixed Lifestyle were the best-performing stocks in the index. 

The Hang Seng index also rallied after rising optimism that the Federal Reserve will pause its interest rate in this month’s meeting. Data published last week showed that America’s consumer confidence dropped in August.

Further, the non-farm payrolls showed that the unemployment rate rose from 3.5% in July to 3.8% in August. Wage growth missed estimates as the economy added over 180k jobs.

Actions of the Federal Reserve are important for Hong Kong stocks because of the Hong Kong dollar peg. To maintain the peg, Hong Kong’s central bank always follows the actions of the Fed. As such, there is a likelihood that HKMA will leave rates unchanged.

Still, the Hang Seng index faces significant challenges as the Chinese economic weakness continues and as foreign investors rotate back to the United States.

Hang Seng index forecast

The daily chart shows that the Hang Seng index has drifted downwards in the past few weeks. In this period, it has formed a descending channel shown in black. 

The index is also hovering at the 25-day and 50-day moving averages. A look back shows that it formed an inverted head and shoulders pattern, which is usually a bullish sign. The right shoulder coincides with the current price.

Therefore, the outlook for the Hang Seng index is neutral with a bearish bias. The key support and resistance levels to watch are H$17,611 (August low) and H$20,000 (July high).