World-beating stock gain in Hong Kong falters after two days

Bloomberg

A world-beating stock gain is quickly unraveling in Hong Kong, showing how fast sentiment can change as protests convulse the city.
The Hang Seng Index lost 0.8% on Wednesday. It had surged 2.9% in two days, with volatility sinking 11% in that time. Short-selling volume reached 16% of total equity turnover — near a record of 20% in August — as bears were forced to unwind their positions. Forward points on the local dollar had slumped across tenors, signalling speculators were also retreating in the currency market.
Adding to the tension on Wednesday was a unanimous vote from the US Senate passing a bill aimed at supporting protesters in Hong Kong and warning China against a violent suppression. China reiterated its threat to retaliate against the bill. It comes after the city just witnessed one of its most violent weekends since the unrest began five months ago.
“Very weak fundamentals will take over investor sentiment at some point,” said Hao Hong, head of research at Bocom International. “I’m not making any big calls at the moment. It’s a very short-term trend trade that can disappear very quickly.”
Theories on what had supported gains earlier this week range from beaten-down valuations, China’s move to trim borrowing costs to recently improved sentiment towards US-China trade negotiations. Hong Kong’s political situation remains unclear, with any delay of local district elections due this weekend a potential flash point for further unrest.
The Senate measure would require annual reviews of Hong Kong’s special status under US law to assess the extent to which China has chipped away the city’s autonomy. China’s Foreign Ministry has repeatedly warned that there would be “strong countermeasures” for passing legislation supporting protesters. Hong Kong’s benchmark stock gauge fell below the 27,000 level.
“If the bill becomes law, we will see more downside because China will further delay the trade deal,” said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. “The news may cause some mild profit-taking in the short term after the Hang Seng Index rallied.”
The Hang Seng Index rose 1.6% on November 19, building on the previous day’s 1.4% advance. Stocks sensitive to the protests, such as property developers, were among leading gainers as were technology shares, which Pictet Asset Management Pte’s Andy Wong said are generally shielded from the political situation.
The gauge trades at just over 10 times the next 12 months’ earnings, a 35% discount to global peers, data compiled by Bloomberg show.