US inflation fears spook investors
Investors cut and ran yesterday, quitting the rally in the Hang Seng Index amid mounting speculation that the US central bank will soon fan inflation in a last-ditch bid to rev up growth.
The Federal Reserve will meet next week and is expected to unveil an asset purchase scheme which investment banks estimate could ultimately amount to between US$1 trillion and US$2 trillion. It has signalled recently that it will tolerate higher inflation levels if growth initiatives can reduce unemployment.
The central bank has already pumped US$1.7 trillion into the financial system and slashed lending rates to almost zero.
'People are afraid that the Fed will flood the market with so much money that it will spark inflation,' said Francis Lun Sheung-nim, general manager of Fulbright Securities. 'And the stock market has risen too much already [so] people are selling,' he added.
The Hang Seng Index registered its biggest one-day fall in four months, dropping 1.9 per cent, or 436.66 points, to 23,164.58. Lun expects it to slide below 23,000 in the near term.
The selling was across the board, dragging down all but two of the index's 45 stocks. Hong Kong Exchanges and Clearing lost 3.2 per cent and Bank of Communications fell 3 per cent. PetroChina slumped 4.3 per cent.
Other regional markets were also hit by selling pressure. South Korea's benchmark Kospi Index dropped 0.51 per cent, Taiwan's Weighted Index declined 0.63 per cent, and Australia's S&P/ASX 200 Index fell 0.85 per cent.
The mainland's benchmark Shanghai Composite Index declined 1.5 per cent, or 44.50 points, to end the day at 2,997.05.
Regional investors were spooked by an unexpected appreciation in the US currency this week, worrying it could curb the inflow of hot money.
'All eyes are on the dollar now since investors understand that a stronger dollar would dent the hot money inflow to the yuan-denominated A shares,' said Dazhong Insurance fund manager Wu Kan.
'Indeed, many funds had started to cash out to lock up their gains following a strong rally recently.'
The US dollar gained as much as 1.1 per cent against the Japanese currency at one point yesterday, according to Bloomberg data. Before yesterday it had weakened more than 2 per cent against the yen so far this month.
Investors may also have bailed out of the stock market to take profits and cash in on the recent rally.
The Hang Seng Index has risen 12.8 per cent since the start of September after falling 6.1 per cent in the first eight months of the year. It has consolidated over the past two weeks, edging down 1.3 per cent.
'After the sharp rebound in the past two months, we won't be surprised to see some correction in the near-term,' said Grace Tam, vice- president of investment services at J.P. Morgan Asset Management.
