The Hang Seng Index fell over 2%, with commodities and Chinese telecom stocks under pressure

Last Friday (30th), U.S. President Trump nominated Waller to succeed the Federal Reserve Chairman, and the market is focused on interest rate trends and potential "balance sheet reduction" measures. Prices of commodities, Bitcoin, and others plummeted, and Hong Kong stocks were also under pressure today (2nd). The Dow Jones and Nasdaq both fell nearly 0.4% and 0.9% last Friday. At the time of writing, the yield on U.S. 2-year bonds dropped to 3.512%, and the yield on U.S. 10-year bonds fell to 4.214%, while the U.S. dollar index rose to 97.19. Dow futures are down 213 points or 0.4%, and Nasdaq futures are down 277 points or 1.1%. The manufacturing PMI in mainland China for January fell to 49.3, missing expectations. The Shanghai Composite Index dropped 102 points or nearly 2.5% to close at 4,015 points, the Shenzhen Component Index fell 2.7%, and the ChiNext Index declined 2.5%, with a total trading volume of 2.58 trillion RMB in the Shanghai and Shenzhen markets.

The Hang Seng Index fluctuated downward, opening down 289 points before the decline widened, dropping as much as 879 points in the afternoon to a low of 26,507 points, closing down 611 points or 2.2% at 26,775 points; the Hang Seng China Enterprises Index fell 236 points or 2.5% to close at 9,080 points; the Hang Seng Tech Index dropped 191 points or 3.4% to close at 5,526 points. The total trading volume for the day was 347.886 billion HKD. The total trading volume of northbound funds was 138.285 billion HKD, while southbound funds had a net inflow of 1.907 billion HKD today (compared to a net inflow of 3.222 billion HKD on the previous trading day).

The Tracker Fund of Hong Kong (02800.HK) fell 2.4% to close at 26.94 HKD, with a trading volume of 24.64 billion HKD, and a short selling amount of 10.739 billion HKD, with a short selling ratio reaching 43.584% (compared to 38.714% and 31.874% for the 3-day and 5-day averages, respectively). Southern Hang Seng Technology (03033.HK) declined 3.7% to close at 5.4 HKD, with a trading volume of 7.89 billion HKD and a short selling ratio of 30.52% (compared to 19.671% and 24.169% for the 3-day and 5-day averages, respectively). Automotive stocks were under pressure, with BYD (01211.HK) dropping 6.9% to close at 91 HKD, as the company's January sales of new energy vehicles fell 30.1% year-on-year (down 50% month-on-month). Hua Hong Semiconductor (01347.HK) fell 11.2% to close at 103.4 HKD. Macau's January gaming revenue increased by 24% year-on-year, exceeding expectations, with gaming stock Sands China (01928.HK) rebounding 4.1%.

【Automotive stocks under pressure, commodity stocks sold off】

Gold and silver prices continued to decline, with spot gold dropping to a low of 4,402 USD per ounce, and the latest price reported at 4,645 USD, down 4.5%. Shandong Gold (01787.HK) fell 12.6%, while China Silver (00815.HK), Zhaojin Mining (01818.HK), China Gold International (02099.HK), and Zijin Mining International (02259.HK) fell between 7.9% and 8.6%, with Zijin (02899.HK) down 5.6% Resource stocks including Jiexin International Resources (03858.HK), China Nonferrous Mining (01258.HK), Jiangxi Copper (00358.HK), and Minmetals Resources (01208.HK) fell by 7% to 8.6%, while Aluminum Corporation of China (02600.HK) and Luoyang Molybdenum (03993.HK) dropped by 6.6% and 4.7%, respectively. Hongqiao (01378.HK) decreased by 3.5%.

Dongxing Securities published a report stating that recently, influenced by the turmoil surrounding the Federal Reserve Chair candidate, Trump's statements on dollar exchange rate intervention, and the situation in Iran, gold and silver precious metals surged and then plummeted. The firm believes that the market has a significant misunderstanding regarding the "hawkish" interpretation of future Federal Reserve Chair Walsh, expecting that after Walsh takes office, there will be more interest rate cuts within the reasonable range of the Taylor rule than the market anticipates, and his views on balance sheet reduction do not have the conditions to be implemented in the current dollar liquidity environment. However, the market may still have to wait until May 16, when Walsh officially takes office as the new Federal Reserve Chair, for a reversal of the "Walsh trade," at which point short-term U.S. Treasury yields may decline, while long-term U.S. Treasury yields may rise due to the term premium brought about by the trading reversal.

The firm anticipates that there is a risk of reversal in the "Walsh trade," but the timing may be in May. Firstly, from his latest views, Walsh's stance on "balance sheet reduction" is more about expressing opposition to the unlimited expansion of the Federal Reserve's balance sheet, and he believes that U.S. inflation is not due to an overheating economy, and balance sheet reduction can indirectly pave the way for interest rate cuts. Secondly, Walsh's personal relationship with Trump will make him more inclined to maintain "alignment" with Trump in the execution of monetary policy. Lastly, in the current dollar liquidity environment, the Federal Reserve does not have the conditions for balance sheet reduction. If Walsh starts balance sheet reduction immediately after taking office, leading to a liquidity crisis similar to that of 2019, it would be detrimental to the smooth implementation of subsequent policies.

【Stocks Down Over 40% Telecom Stocks Decline】

The Hong Kong stock market has turned weak, with the rise and fall ratio of main board stocks at 10 to 42 (compared to 15 to 37 the previous day), with 1,764 stocks declining (a drop of 3.5%). Today, 11 constituent stocks of the Hang Seng Index rose, while 75 fell, with a rise and fall ratio of 13 to 85 (compared to 10 to 90 the previous day). The market recorded short selling of HKD 54.122 billion, accounting for 17.421% of the total turnover of shortable stocks at HKD 310.676 billion (compared to 18.108% the previous day).

China Mobile (00941.HK), China Unicom (00762.HK), and China Telecom (00728.HK) all announced that the value-added tax on telecommunications services will be adjusted from 6% to 9% this year. China Telecom and China Unicom's stock prices fell by 5% and 6.3%, respectively, while China Mobile's stock price decreased by 2.3% to HKD 78, with a turnover of HKD 6.97 billion.

Morgan Stanley published a report stating that the Ministry of Finance and the State Administration of Taxation of China jointly announced a new classification of value-added tax, including mobile data, broadband access, and SMS/MMS into basic telecommunications services, with the tax rate raised from the original 6% to 9%. Following the announcement, the three major Chinese telecommunications operators indicated that their revenue and profits would be negatively impacted The bank believes that the extent of the above impact depends on two factors: (1) the proportion of affected revenue and (2) the net profit margin. According to the bank's calculations, China Telecom and China Unicom's earnings per share may be affected by 14.1% and 15.2% this year, while China Mobile, due to its higher profit margin, is expected to be affected by 7.8%.

Morgan Stanley pointed out that the current earnings per share and dividend per share forecasts for Chinese telecom stocks have not yet accounted for this tax rate adjustment. If the dividend payout ratios are not increased (estimated at 77% for China Mobile, 78% for China Telecom, and 65% for China Unicom), the three major operators may see a decline in earnings per share and dividend per share by 2026