Hong Kong stocks post their sharpest decline since March; other Asian markets are down. What's going on?

Asian stocks fell on Friday, October 2. Investors were reacting to sharp fluctuations in the bond and currency markets ahead of key U.S. employment data, according to Reuters .

The Hang Seng Index in Hong Kong saw the sharpest decline, falling 2.6%. This marked its steepest one-day drop since March 23, Bloomberg noted. The MSCI Asia-Pacific broad stock index (excluding Japan) fell 0.3%. Japan’s Nikkei 225 lost 0.9%, but it still ended the week up about 3%.

Trading in Hong Kong resumed on Friday following a holiday, amid pressure from a spike in U.S. Treasury yields and disappointment over China’s new economic stimulus measures. Investors viewed the measures as sufficient only to sustain current growth rates, but not to spur a broader economic recovery, according to Bloomberg.

Overall, the index of Chinese companies listed in Hong Kong fell by more than 2%. Stock exchanges in mainland China are closed through October 8 due to national holidays.

The financial sector exerted the most pressure on the market: shares of investment bank HSBC in Hong Kong fell 5.4%, marking their steepest one-day decline since June 10. Shares of China Construction Bank and Bank of China each lost 2.7%. Declines in the share prices of tech giants Alibaba Group (down 2%) and Tencent (down 2.3%) also weighed on the market.

Shares of global financial companies came under pressure due to the continuous rise in yields on benchmark Treasury bonds, Bloomberg notes. On Thursday, the yield on 10-year U.S. Treasury bonds reached its highest level since 2002, prompting investors to reassess the impact of rising borrowing costs on the banking sector.

Rising U.S. yields are weighing on Hong Kong stocks, as the local dollar’s peg to the U.S. dollar is leading to tighter financial conditions in Hong Kong. For financial companies, higher interest rates may support net interest margins, but this benefit is offset by weaker demand for loans, rising costs of corporate financing, and increased credit risks.

“Rising bond yields and tighter financial conditions are putting strong pressure on financial sector stocks, which, in the case of HSBC, is compounded by concerns about potential taxes on British banks, — Gerald Gunn, chief investment officer at Reed Capital Partners, noted in a comment to Bloomberg. — “I view this more as a broader reevaluation of the world’s largest financial companies amid a short-term flight from risk.”

“Although price volatility is being exacerbated to some extent by the lack of capital inflows from the mainland and low liquidity during the holiday week in China, the distinctly defensive sentiment in the morning session sends a clear signal: investors are unimpressed by Beijing’s growth-support measures announced earlier this week,” commented Homin Li, senior macro strategist at Lombard Odier Singapore, on the market dynamics in Hong Kong (as quoted by Bloomberg).

"Stocks in the Hang Seng Index are also facing additional pressure from the U.S. interest rate cycle, which is being transmitted through the Hong Kong dollar's peg," Li added.

“Financial companies in Asia have remained resilient as rising yields widen interest rate margins, but at some point, the sell-off in risky assets will reach them as well, especially as concerns about credit risks and corporate spreads grow,” said Leonid Mironov, portfolio manager at Gavekal Capital, in comments to Bloomberg.

This article was AI-translated and verified by a human editor