Can Hong Kong Escape the Pressure of Higher Rates?

the Russell 2000

We do not need to wait for a sharp fall in the S&P 500 or Nasdaq to see the effects of higher interest rates. By October 14, the Russell 2000 had fallen more than 10% from its August peak, entering correction territory. Smaller companies generally depend more on external financing, making them more sensitive to rising borrowing costs. Their performance deserves attention. The concern over recent months has been that a resilient US economy could keep rates elevated for longer. Strong economic activity can support revenue, while higher financing costs squeeze earnings and valuations. Risk assets can face considerable pressure well before the economy enters a recession.

Bitcoin’s decline this year and the recent selloffs in India and South Korea should, in my view, be understood against the same financial backdrop. When dollar deposits and short-term US Treasuries offer attractive returns, the hurdle for taking additional risk rises. Investors have a stronger incentive to hold these assets, while equity allocations may favour larger, more liquid US companies. Other markets need to offer higher expected returns to compete for capital. That is the pressure a prolonged period of high rates places on risk assets. With US small caps already correcting and Indian and Korean equities under pressure, it is difficult to believe that lower valuations alone can insulate Hong Kong from the same repricing.

Hang Seng Index and 2018 pattern

This is also why the comparison between the Hang Seng and its 2018 pattern deserves another look. In my early July article, I suggested that the index could test its 200-week moving average in the latter half of the third quarter. That timing was early, but the subsequent rebound has not reversed the pattern of lower highs. The Hang Seng has returned to around 24,000, testing the rising support line extending from its 2024 low.

HSI/HKM2 fallen below 200W Moving Average

The ratio of the Hang Seng to Hong Kong’s M2 money supply has also fallen below its long-term moving average and is approaching its own rising support. A confirmed weekly break, followed by a failed recovery, would bring the 200-week average near 21,450 into sharper focus. Conversely, holding support and breaking above declining resistance, alongside stabilisation in other rate-sensitive markets, would weaken the case for further downside. For now, the stance remains cautious. Until financing costs ease meaningfully, Hong Kong needs stronger earnings and sustained investor demand to support a lasting divergence.

NFA DYOR.