Hang Seng tumbled hard due to headwinds from US and China

Why is the Hang Seng index falling?

The Hang Seng index crashed for multiple reasons, the first being due to investors staying cautious in preparation for a deluge of economic data and corporate earnings that is about to be unveiled this week.

As traders are preparing to respond to the renewed inflation concern sparked by the US’s June CPI on Wednesday, the CPI is expected to rise 8.8% on the annual rate, which would be a four-decade high. That being, the market and the central bank are also focusing on the core inflation which excludes the food and energy price component as that print is expected to show some ease from 6% to 5.8%.

If inflation turns out to still be hot, the Federal Reserve will continue hiking interest rates in the coming months. The baseline is that the Fed will hike rates by 0.75% in July, followed by 0.50% in September.

The Hang Seng index continues to fall as investors react to China’s top authority sending a warning of 'very high' risk after Shanghai reported a sub-variant covid virus, its first case on Sunday. The message has sparked fears of a return to its previous lockdown and continues to further damper China’s beleaguered economy.

China’s economic outlook

This week we will have the opportunity to get more insight into China’s economic health which will come from the official 2Q GDP print due on July 15th. On paper, it’s expected to be a number just above the water, around 0.7% increase.

On the positive side, it has increased from the -1.6% in the first quarter which could keep its economy from recession. The most recent data from China pointed to a recovery in June when the two largest cities, Shanghai and Beijing, exited their lockdown.

For the more pessimistic viewers, that means a great downsize from the previous 1.9% expectation. For a long-term view, the growth outlook is bleak as long as China sticks to a zero Covid policy and tight restrictions. As a result, most economists expect China's yearly GDP growth to be only half the level of 2021, at around four percent.

Hang Seng Index technical analysis

The daily chart highlights a bear-biased sign that this recent decline has broken through the months long trendline formed since mid-May. This decline has taken us back into a support zone that is coming from the lowest level in June and a break below 20677 would enhance the risk of further downside to the next support around 20460.

On the flip side, should the price attempt to bounce from the support, the imminent challenge will be the 100-day moving average near 21164.

Hang Seng daily chart

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