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Hong Kong equities likely to fall this week

HONG KONG: Hong Kong stocks are expected to fall this week following Friday's steep losses on Wall Street on fears the Federal Reserve will have to take firm action to rein in the U.S. economy, analysts said.

"The decline in the U.S. market will (depress) the stock market on Monday," Ricky Tam, senior research analyst at Delta Asia Securities, said.

The blue chip Hang Seng Index ended higher on Friday for the fourth straight day, up 268.13 points, or 1.68 percent, at 16,185.94. On the week, it gained 1,077.53 points, or 7.1 percent.

The Hong Kong market could test between 15,800 and 16,000, but Tam said those levels would be well supported and Tuesday may see a rebound.

Fears of a steep hike in interest rates hardened on Friday after economic data showed the U.S. economy grew at its fastest pace and labour costs had risen faster than expected.

The Federal Open Market Committee meeting on February 1-2 is expected to raise U.S. rates to counter inflationary pressure in an overheating economy. The question is by how much.

Analysts were mixed on whether the territory, which uses a currency board system that pegs the Hong Kong dollar to the U.S. greenback, would raise rates to mirror the Fed. But they did not think a U.S. rate hike of a quarter percentage point would hurt local sentiment.

"I don't expect the Fed to increase rates by much," Tam said.

Another analyst at an investment bank said the hike was likely to be on the high rather than the low side.

"It is a virtual certainty that the U.S. will hike interest rates, there are people who think it will by 50, and people who think it will be more than that," he said.

"The Hong Kong market is almost certainly going to drop," he said. "Apart from the direct impact on the Hong Kong stock market and investor sentiment, any increase in U.S. interest rates usually means a hike in Hong Kong interest rates."

Institutional activity in Hong Kong would ease while retail investors took profits closer to the lunar new year holiday, which closes markets on Friday and Monday, analysts said.

Local corporate news, regional fundamentals and economic data gave support to the index despite the interest rate concerns, they said.

"News flows from the tech sector and the telecom sector will continue to keep the retail interest alive," Charles Whitworth, head of Hong Kong research at ABN AMRO, said. "The retail sector really doesn't care what the Fed does with rates."

Technology and Internet-related stocks, mostly small-cap non-index counters, led most of the week's rally and were expected to rise more before pre-holiday profit-taking kicked in.

Investors were keeping their eyes open for results of merger talks between telecom giant Cable & Wireless HKT and Singapore Telecom, which were announced on Monday.

Analysts were also watching blue and red chip China Telecom (Hong Kong), which rose 16.6 percent on the week, boosted by expectations it would be included in the Morgan Stanley Capital International's (MSCI) China Free Index.-Reuters