Hong Kong’s Hang Seng Index fell as much as 3% on Friday, its steepest intraday drop since March 23. The dollar peg carried the US yield surge straight into the city.
Higher rates usually help bank margins, yet financials led the selloff. HSBC Holdings shares fell as much as 5.7%.
Why Does the US Yield Surge Hit Hong Kong Harder?
The 10-year Treasury yield touched its highest level since 2002 on Thursday.
The Hong Kong dollar (HKD) trades in a narrow band against the US dollar. As a result, higher US yields can tighten local financial conditions, whatever the city’s economy needs.
“Hang Seng index universe also gets additional headwinds from the US rate cycle channelled through the HKD peg.”
Homin Lee, senior macro strategist at Lombard Odier Singapore, said, according to Bloomberg.
Wider margins have protected Asian banks so far. Leonid Mironov, a portfolio manager at Gavekal Capital, said a risk-off trade eventually reaches financials too. Rising credit risk concerns make that more likely, he said.
In morning trading, Standard Chartered fell about 5% and insurer AIA Group nearly 6%, according to Bloomberg’s China Show.
Can Hong Kong Find Support Elsewhere?
Not this week. Mainland markets stay shut until Oct. 8 for China’s Golden Week holiday.
That removes southbound flows, which are mainland investors’ purchases of Hong Kong shares, and thins liquidity.
However, Beijing’s stimulus package, unveiled earlier this week, left investors wanting more. Meanwhile, a Bloomberg gauge of Chinese property developers fell as much as 4.3%.
In contrast, tech held firm in Taiwan and Japan, but Alibaba Group and Tencent Holdings weighed on the Hang Seng.
Mainland traders return Oct. 8. Their buying will show whether Friday reflected thin holiday trading or a lasting repricing of Hong Kong risk.
While the Fed’s rate hike cycle continues, the peg leaves Hong Kong without its own rate path.