Is Hang Seng Index bottoming out yet?

After the worst year in a decade, Hong Kong stocks bounced back strongly this week, with both Hang Seng Index and Hang Seng Tech Index moved up for five straight days and touching their highest level in more than six weeks. Notably, the beleaguered Chinese technology companies are cheering for the best gains since October.

What drives the Hang Seng up this week?

As a response to the panic sell-off across the equity market last week, Fed Chair Jerome Powell commented on Tuesday to soothe the over-stressed investors by temporarily ruling out an accelerated change in the central bank’s policy. The move has brought back the risk appetite for the growth assets amid boosting tech-heavy Nasdaq by over 3% since early this week.

Following the footprint from the US stock market, the Hang Seng Index rose 2.8% to 24,402.17 by the close of Wednesday trading, a level not seen since November 25th. The Tech Index soared by 5%, the most gain in three months.

Another crucial factor to power the Hong Kong index comes from China’s newest CPI figure, which shows a slowing down of inflation (CPI was up 1.5% in December compared to 2.3% in November). The fresh reading was welcomed by the market as it opened room for the Chinese government to loosen monetary policies further and start to introduce economic stimulus tactics, for example, more interest rate cut.

What would be the challenge ahead?

Looking ahead, it might not be safe to say that Hang Seng Index has shrugged off the main concerns that weigh on the Index throughout 2021, including the Chinese government’s regulatory crackdowns and the worrying over soaring inflation globally. Some may argue that the worst of the policy onslaught have passed. However, there’re still more that remain unsettled. Chinese property developers’ debt issue is undoubtedly one among them.

The slowing down of the Chinese economy is another challenge that Hong Kong’s equity market cannot avoid. Although the Chinese government is expected to introduce economic stimulus whenever needed, the financial costs of Beijing’s Covid-zero strategy appear now to be the leading threat to its growth in 2022. Goldman Sachs even believed that in an extreme scenario where a national lockdown is imposed, annual growth could plunge to 1.5%, the lowest recorded since 1976.

Overall, although the squeeze from the worst year in a decade leaves Hang Seng in the appealing position for a rebound, the outlook for 2022 remains uncertain and risky.

Technical Analysis

A breakout from the downward trajectory and the “double-bottom” formed since early December, accompanied by increasing trading volume, could be taken as a positive sign for the Hang Seng Index. The RSI was edging higher, nearing overbought territory around 70, suggests the return of optimistic buyers. However, a near-term breath could be in prospect considering that RSI has reached its highest level for the past three months.

From a technical point of view, after standing above the 20-days moving average, the index will be first challenged by 24798 level before testing the three-month-high at 25701. On the other hand, the level of 24205 will stay as crucial support for now, which, if broken, might see the index backstepping toward 23835.

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