The Hang Seng index has moved sideways in the past few weeks as the recent hype surrounding China’s stimulus policies faded. The index, which tracks the 40 biggest companies in China, has remained at the important support level at H$20,535, much lower than the year-to-date high of H$23,245.
Status quo or continuation?
The Hang Seng index is in a tight range as investors wait for the upcoming US election that will determine whether China and US relations escalate or ease.
A Kamala Harris victory will mean that the status quo will continue in the next four years. Under Biden, the two countries have remained in a cold-war-like scenario, where tensions have continued. For example, the two countries have maintained their tariffs and announced several countermeasures.
A Trump victory, on the other hand, will point to more escalation between the two countries, which will affect Chinese equities. Trump has continued to focus on the trade deficit between the US and China.
In his view, he believes that tariffs could bridge that gap, a move that most analysts reject. Besides, the trade deficit has continued to widen after he imposed tariffs in the first term.
Imposing tariffs on Chinese goods will only make American products more expensive because it is unlikely that companies that manufacture their products in China will move to the US, a country where wages and regulations have grown in the past few years. The Hang Seng and other Chinese indices will be highly volatile if Trump wins the election.
With a day to go to the election, it is unclear who will win it. Prediction markets like Polymarket and Kalshi have Trump winning, while traditional polls are dead-heat. In the past, these polls have not worked out well, as we saw in the 2016 election.
Read more: CSI 300 swings, Hang Seng drops amid market shifts while gold hits record high
Federal Reserve and HKMA decisions
The next key catalysts for the Hang Seng index will be the Federal Reserve and HKMA decisions that will come out on Wednesday and Thursday.
Analysts expect that the Fed will decide to cut interest rates by 0.25% in this meeting, a move that will bring the headline rate to 4.75%.
The HKMA will be forced to cut Hong Kong rates as it has done in the past. Its cuts mirror those of the Federal Reserve because of the peg that exists on the Hong Kong dollar.
The Hang Seng index will also react to the upcoming details on the stimulus packages announced by Beijing in the past few weeks.
Most of the stimulus measures have been muted, with details expected to come out this week. One option is for the country to issue over $1.4 trillion debt over three years to address key areas of the economy like local government debt and the property market. According to Reuters, Beijing will consider more stimulus if Trump wins.
Read more: As the Hang Seng, CSI 100 indices dip, time to buy the dip?
Hang Seng index analysis
HSI chart by TradingView
The daily chart shows that the Hang Seng index topped at H$23,245 as Beijing started talking about stimulus a few weeks ago. It then suffered a harsh reversal as the enthusiasm of the stimulus policies faded.
The index has remained above the 50-day moving average, meaning that bulls are in control for now. However, it has also formed a bearish pennant pattern, which is characterised by a long vertical line and a symmetrical triangle pattern. In most periods, this is one of the most bearish patterns in the market.
Therefore, the Hang Seng index will likely have a bearish breakout this week, with the next point to watch being at the 50-day EMA at $19,670, which is about 4.22% from the current level.
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