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Hong Kong stocks slid amid concerns China's policy stimulus will be too little too late to rejuvenate its post-pandemic economic recovery. While the Federal Reserve is certain to pause on its rate hikes, traders have since trimmed wagers on a rate cut in future meetings this year.
The Hang Seng Index dropped 0.8 per cent to 19,359.95 at 2.49pm local time, after rising as much as 0.6 per cent to a three-week high. The Tech Index was little changed, losing all of its 1.9 per cent advance, while the Shanghai Composite Index fell 0.1 per cent.
Bank of China (Hong Kong) lost 1.6 per cent to HK$3.11, while peer ICBC tumbled 2.4 per cent to HK$4.15 and China Merchants Bank fell 2.6 per cent to HK$36.85. Travel agency Trip.com slumped 5.7 per cent to HK$280.40 while Budweiser slipped 2.5 per cent to HK$21.15.
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Limiting losses, Tencent added 0.8 per cent to HK$347.60, while Baidu advanced 1.7 per cent to HK$140.40 and EV maker Xpeng surged 4.4 per cent to HK$41.55.
Investors this week drove the city's benchmark index to a three-week high amid speculation Beijing will take steps to shore up the floundering recovery. China on Tuesday cut the seven-day reverse repurchase rate to guide short-term rates, prompting Goldman Sachs and Nomura to predict a rate cut on Thursday.
"Reported optimism regarding Hong Kong equities seems unwarranted," said Brock Silvers, chief investment officer at Kaiyuan Capital in Hong Kong. "China's recovery seems to have stalled, and authorities are so far unwilling to mount an effective response, preferring a wait-and-see approach."
China's central bank will almost surely deliver a 10-basis point cut in one-year [lending] rate cut on June 15, and the loan prime rate on June 20, Nomura analysts including Ting Lu wrote on Tuesday. "The risk of an economic double-dip is on the rise. We believe Beijing still has to do more over the rest of this year."
Traders now see a 94 per cent chance of status quo when the Fed announces its decision later today, according to Fed fund futures, after US inflation slowed to 4 per cent in May from 4.9 per cent in April. Still, the market has rolled back expectations for a rate cut in the next four meetings this year, versus a week ago.
"We believe the Fed should maintain a hawkish stance to leave all options open, including the possibility of a further rate hike in the coming months," Franck Dixmier, global chief investment officer for fixed income at AllianzGI, said in a report. "It will be interesting to see how the Fed updates its growth and inflation scenarios, as well as its projected interest rate outlook."