Why Didn't Hong Kong Stocks Rise but Fall After the Fed's “Hawkish” Interest Rate Hike? A Deep Analysis of the Underlying Logic
Hello everyone, I'm your financial observer. On September 17th, a significant event occurred in the global financial community: the Federal Reserve (the central bank of the United States) raised interest rates.
For many people, the term “interest rate hike” might trigger thoughts like, “Oh, interest rates are going up, so it’s more profitable to save money,” or “The worst is over; should the stock market start to rise now?”
However, the reality was quite different: Hong Kong stocks not only didn’t rise but continued to fall, with the Hang Seng Index dropping by 0.73% by midday. Why didn’t the expected rebound happen? What signals did this interest rate hike send, and what impacts will it have on us ordinary investors and the global economy?
Don’t worry; let’s break down this news in simple terms.
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I. Core Summary: Expectations Were Unmet, and the Market was “Disappointed”
In one sentence: The Federal Reserve did raise interest rates, but its stance was more “hawkish” than expected, suggesting that more hikes are likely in the future, possibly for an extended period. This uncertainty scared the market, causing funds to withdraw, leading to a decline in risk assets like Hong Kong stocks.
Key Points:
1. Action: The Federal Reserve raised interest rates by 25 basis points, bringing them to 3.75%-4.00%.
2. Stance: Chairman Kevin Warsh emphasized that fighting inflation is the top priority, with a firm and decisive tone.
3. Consequences: The market had hoped that the hikes would stop after this round, but it turned out there would be more, leading to pressure on Hong Kong stocks.
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II. Deep Analysis: Understanding the Interest Rate Hike from Five Perspectives
1. Why is it Called “Hawkish”? It’s Like the Boss Suddenly Saying “More Overtime”
In the financial world, “hawkish” and “dovish” describe the central bank’s attitude:
- Dovish: Gentle, advocating low interest rates to stimulate the economy, making money seem cheaper and encouraging investment.
- Hawkish: Aggressive, advocating high interest rates to curb inflation, making money seem more expensive and discouraging spending.
Why is this hike considered “hawkish”?
Although the 25-basis-point increase was within expectations, Chairman Warsh’s remarks at the press conference were very firm. He labeled inflation as the biggest threat and hinted that more rate hikes might be needed this year or even next year (2027).
Popular Explanation:
It’s like the boss announcing a bonus (the interest rate hike) and then saying, “But to control costs, we might have to cut salaries next month, and there’s a high chance of more cuts in the future.” Employees (investors) were expecting a relief after the bonus and were disappointed, so they chose to wait and see or even withdraw their funds.
2. Why Were Hong Kong Stocks the First to Be Affected? Because It’s an “Offshore Market”
Some might wonder: The Federal Reserve is the U.S. central bank, so why did Hong Kong stocks perform so poorly?
Key Logic: Hong Kong stocks are an offshore market highly sensitive to the U.S. dollar.
- Currency Link: The Hong Kong dollar is pegged to the U.S. dollar. When the Fed raises interest rates, the U.S. dollar strengthens, and Hong Kong’s interest rates must follow.
- Capital Flow: When U.S. interest rates rise and are expected to continue to rise, global funds (including hot money) prefer to invest in the U.S. or buy U.S. bonds, pulling money out of emerging markets like Hong Kong.
- Valuation Pressure: Many Hong Kong stocks are in the technology and growth sectors, whose values depend on future earnings. Higher interest rates reduce the value of these stocks due to increased discount rates.
Popular Explanation:
Imagine Hong Kong stocks as a pool, with the U.S. dollar as the water source. The Fed’s hike raises the water level and makes the water (interest rates) more attractive. Funds that were in the pool (Hong Kong stocks) flowed back to the source (the U.S.).
3. Why Didn’t the Market React with a Rebound? Because There’s More Uncertainty Ahead
There’s a common belief in the stock market that once all bad news is released, prices should start to rise. But this time, it didn’t happen because the hike brought new uncertainties:
- Previous Expectations: The market hoped that one hike would stabilize inflation and that rates would lower next year.
- Current Situation: The Fed indicates that inflation is still not under control and that more hikes are possible this year and next year.
This means the expected end of the rate hike has been pushed further into the fourth quarter. With uncertainty remaining, funds prefer to wait and see.
Popular Explanation:
You’re running a marathon, thinking the finish line is near (the interest rate hike), ready to sprint. But then the referee moves the finish line 5 kilometers back and says the road ahead is worse. You lose motivation and might even want to stop (funds flow out).
4. Who’s Taking the Brunt? The Limited Power of Southbound Funds
The news mentioned another key factor: Southbound Funds from the Chinese mainland.
- What are Southbound Funds? They are investors from the Chinese mainland investing in Hong Kong through the Stock Connect program.
- Current Situation: Southbound funds are buying Hong Kong stocks to support the market, but the global tightening of liquidity (strengthening the U.S. dollar) is too strong.
- Insufficient Impact: Their efforts are not enough to counter the outflow of funds.
Popular Explanation:
Hong Kong stocks are like a bucket with a leak. Southbound funds are trying to fill it, but the leak (capital flowing back to the U.S.) is faster. The bucket’s level (stock prices) still drops.
5. What’s the Future of the Market? “Diversification” Will Be the Trend
For investors, here are some key recommendations:
1. Short-term Weakness: Before the Fed clarifies its future policy, it’s unlikely for the overall Hong Kong stock index to rise significantly.
2. Structural Diversification: Although the market may not rise as a whole, individual stocks with solid performance and reasonable valuations could perform well.
- Benefiters: Companies that receive heavy investment from Southbound funds.
- Losers: High-valued, story-driven tech stocks.
3. Wait for Signals: The market needs time to adjust to higher and longer-term interest rates. Pay attention to two indicators:
- Whether U.S. inflation data improves.
- Whether the Fed actually stops raising rates.
Popular Explanation:
The current market is like a muddy road after a storm. Overall, it’s not favorable, but if you have a robust stock (high-quality company) and know where the safe routes are (where Southbound funds are flowing), you can still succeed. If you own high-valued stocks, you might face challenges.
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III. Advice for Ordinary Investors
1. Don’t Rush to Buy on Low: Don’t invest heavily just because the worst news is out. The Fed’s hawkish stance indicates more risks.
2. Focus on Cash Flow: In a high-interest-rate environment, companies with stable cash flows and dividends (such as utilities and high-dividend blue chips) are safer than growth stocks.
3. Diversify Your Portfolio: Don’t put all your eggs in one basket (Hong Kong stocks). Consider diversifying into U.S. assets (e.g., bond funds) or gold to hedge against a stronger U.S. dollar.
4. Patience is Key: The market needs time to adjust. Wait for clearer policy signals and focus on the fundamentals of individual stocks rather than just following market fluctuations.
In Summary:
The Fed’s interest rate hike was more aggressive than expected, leading to a decline in Hong Kong stocks as a normal reaction to higher and longer-term interest rates. For investors, now is not the time to take big risks but to select quality stocks and manage your portfolio carefully. By understanding the market trends, you can stay ahead in this financial upheaval.