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While the macro focus in the second quarter will fall on normalization of policy from very accommodative fiscal and monetary settings, Hong Kong stock markets could be range-bound under the shadow of macro uncertainties, even though micro momentum remains supportive.
In a testimony to the Congress, Federal Reserve Chairman Ben Bernanke presented a cautiously upbeat assessment of the economic outlook and left few new clues regarding the future path of monetary policy in the U.S.
In the meantime, improved financial market conditions allow the Federal Reserve (Fed) to unwind special liquidity support facilities that have been established in times of systemic crisis, but these actions do not necessarily carry a broader policy signal. Bernanke reiterated that the fed funds rate is likely to remain exceptionally low for an extended period. Yet, he also indicated that "at some point" the Fed will need to tighten monetary supply. We envisage that expectations of inflation rise will eventually push the Federal Open Market Committee to nudge official rates higher in modest manner in the second half of 2010 (2H10). Monetary and fiscal policies will likely to remain expansionary around the globe in 2H10 and we believe that the risk of a global double-dip in this year is not significant.
 Source: Federal Reserve, BOCHK
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The Greek crisis has brought sovereign debt to the forefront and captured market attention. Whilst the Greece government has already put in pace a solid start to its adjustment process, Europe's ever-louder promises of help for Greece should further have assuaged market worries. Nonetheless, the degree of solvency issues facing Greece is not shared by other Euro-zone members, taking the economic fundamentals difference across regions into consideration.
Source: EU, BOCHK
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As regards domestic capital market, the Hong Kong stock market remained essentially unchanged in the first quarter. Reasonable valuations suggest key macro concerns appear to be well priced in. Yet, there are areas of concern for China banks that actively involved in local financing and real estates stocks. However, the limited risk of local financing and reaffirmation of pro-growth orientation from China's policymakers imply that these are manageable challenges. We believe those threats are not likely to pose systemic risks unless the economy falls into severe downturn.
Source: Economic Research Division, BOCHK
Information provided on 15 April 2010
Risk disclosure:
The above information is for reference only and is not intended to provide investment advice and should not be relied upon as such. The above information is prepared on the basis of materials obtained from sources believed to be reliable but Bank of China (Hong Kong) Limited ("BOCHK") accepts no liability in relation to the use of the above information for any purposes. BOCHK does not make any representation or warranty and accepts no responsibility or liability as to the accuracy, completeness or correctness of the above information. The above information does not constitute an offer or solicitation to enter into any investment arrangement. Investment involves risk. Although investment may bring about profit opportunities, each type of investment product or service comes with its own risks. Due to the fluctuating nature of the markets, the prices of products may rise or fall beyond customers' expectations dramatically and may become valueless and customers' investment funds may increase or decrease in value as a result of selling or purchasing investment products. It is likely that losses will be incurred rather than profits made as a result of buying and selling investment products. Loss may equal or exceed the amount of the initial investment. Income yields may also fluctuate. Due to market conditions, some investments may not be readily realizable. Before making any investment decision, customers should assess their own financial position, investment objectives and experience, willingness and ability to bear risks and understand the nature and risk of the relevant product. For details of the nature of a particular product and the risk involved, please refer to the relevant offering documents. Customers should seek advice from an independent financial adviser.
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