Month: October 2010

Hong Kong stocks rose to a 2010 high on October 6 as investors poured money into local assets on expectations of another round of asset purchases by the US Federal Reserve to stimulate the economy weakened the dollar.

Mainland banking shares, which have a large weighting on the benchmark index, joined the rally after sharply underforming throughout the year.

The Hang Seng Index was up 1.08 percent at 22,884.65 at the midday trading break, moving further into technically overbought territory according to its relative strength index, currently at 78 and well above the threshold 70 level.

With several large cap constituents on the Hang Seng Index already up as much as 20 percent over the past month, investors shifted focus to laggards such as banks.

“Mainland banking shares were hit earlier this year by a weak market coupled with the risk that China would tighten policy by curbing lending or raising capital requirements,” said Mark To, head of research at Wing Fung Financial in Hong Kong. “But with market sentiment improving, investors are chasing laggards and retail as well as institutional investors will likely look to build positions in banks, which are trading at fairly attractive valuations.”

China Construction Bank Corp (CCB), up 2.5 percent, had the biggest positive impact on the main index. Industrial and Commercial Bank of China Ltd (ICBC) rose 1.9 percent.

ICBC shares have fallen 8.5 percent this year compared with a 4.6 percent gain for the Hang Seng Index.

Mainland banks are trading at discounts to their long-term valuations based on their forward twelve-month price-to-book as well as price-to-earnings multiples.

ICBC trades at a 20 percent discount to its ten-year median price-to-book ratio of 2.4. CCB trades at a 17 percent discount.

Property developer Hang Lung Properties Ltd rose 4.9 percent and was the top gainer on the benchmark index. Hang Lung had largely missed the September rally in local property plays, partly due to its exposure to the mainland market.

Hang Lung is up 10.6 percent since the end of August compared with an about 20 percent advance for rivals Sun Hung Kai Properties Ltd and Cheung Kong (Holdings) Ltd.

Bucking the trend, footwear retailer Belle International Holdings Ltd fell 4.4 percent as investors continued to pocket gains after a rally to a life high on Monday.

Turnover on the Hong Kong stock exchange was about HK$62bn in the morning session, more than the 200 full-day moving average, according to traders at Standard Chartered, helped partly by share placements from China Everbright Ltd and Zhongsheng Group Holdings Ltd.

A sustained recovery in trading activity after the summer lull has lifted Hong Kong Exchanges and Clearing Ltd to the highest level since May 2008 and up nearly 30 percent in the past month. HKEx was up 1.9 percent.

The Bank of Japan has pledged to pump more funds into the struggling economy and keep interest rates at virtually zero, surprising markets and stealing a march on the Federal Reserve in providing a fresh dose of economic stimulus.

For months, the central bank had eschewed government calls for more decisive action, such as buying more government bonds, focusing instead on a limited funding scheme.

But in the face of growing evidence that the yen’s strength was hurting the economy, the Bank of Japan cut its overnight rate target to a range between zero and 0.1 percent from 0.1 percent and pledged to buy 5 trillion yen ($60bn) worth of assets.

It also said it would keep its benchmark rate effectively at zero until price stability is in sight. Core consumer prices have been falling from a year earlier since early 2009.

The purchases would roughly match the size of extra stimulus being considered by Prime Minister Naoto Kan’s cabinet.

The assets, ranging from government bonds and short-term government securities to commercial paper and corporate bonds, would come under a temporary scheme that would also cover 30 trillion yen of such assets as collateral under an existing loan programme.

“The BOJ is bringing its monetary policy closer to quantitative easing, allowing market rates to hover near zero and pledging to keep a near-zero interest rate policy in the longer term until prices stabilise,” said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

BOJ policymakers have signalled in past weeks that they were considering a further easing of policy after Tokyo’s intervention in the currency market in mid-September to check the yen’s strength offered only temporary relief.

Most market players, however, had expected the central bank to opt for a relatively minor adjustment of its 30 trillion yen loan scheme that supplies banks with funds at its 0.1 percent rate.

“These steps are more aggressive than markets had expected. The BOJ’s decision is a surprise and will have an impact on currencies due to the message it delivers.”

Central banks under pressure
The surprise move weakened the yen against the dollar, pushed up Japanese government bond futures and helped stock prices turn positive.

The decision to cut interest rates was made by a unanimous vote, but board member Miyako Suda opposed the inclusion of government bonds among the types of assets the BOJ could buy using its pool of funds.

The BOJ is not the only central bank under pressure to do more to support an economy that is showing signs of faltering.

Financial markets expect the Fed to embark upon another round of asset buying to bolster a sluggish recovery as early as its November meeting. There are also calls within the Bank of England for further easing, although the bank has kept markets guessing on whether it will indeed do so.

In Japan, slowing export growth, a surprise fall in factory output and companies’ worries that the strong yen may hurt the outlook have heightened the case for the central bank to ease policy.

The BOJ had already been edging nearer to quantitative easing by allowing the yen pumped into markets through currency intervention to remain in the financial system, instead of draining it.

General Motors Co posted an annual sales gain of 10.5 percent in September amid evidence that the U.S. auto market remained stuck in a slow-moving recovery at the start of the fourth quarter.

GM was the first of the major U.S. automakers to report sales for the month.

Analysts and industry executives expect auto sales near 11.5 million vehicles on an annualized basis in September, almost flat from August after adjusting for the typical early fall slowdown.

GM said it expected industry-wide sales had fallen to a range of about 970,000 to 980,000 vehicles in September compared with sales of over 997,000 in August.

“Consumers are sending a very clear message that they will be cautious with their spending,” GM sales chief Don Johnson told reporters and analysts.

Despite the still-slack demand for new cars that analysts link to consumer concerns about weak housing and new hiring, GM said there were positive developments in its September sales.

The sales results were one of the last snapshots in demand that investors will see for the top US automaker before an initial public offering expected in November.

Johnson and other GM executives said the automaker was heading into the fourth quarter with a much higher share of new models than it had held a year earlier, reducing the pressure for incentives.

GM spent about $3,300 in incentives per vehicle on average to close sales in September. That represented a discount of about 10.7 percent of the average cost – in line with the industry’s average.

Johnson said GM would remain disciplined in pricing and avoid the temptation to rely on more aggressive discounts to drive sales volumes.

“It’s the economic recovery that has to drive our sales,” he said. “Is it slower than everyone would like? Potentially,” Johnson said.

GM was restructured in a bankruptcy funded by the Obama administration and the government is counting on an IPO to reduce its nearly 61 percent stake in the automaker.

For September, GM posted a year-on-year sales gain of 22 percent in the four brands that it opted to keep while in bankruptcy: Chevrolet, Buick, GMC and Cadillac.

Retail sales accounted for about 75 percent of GM’s sales, with the remainder to fleet operators led by car rental agencies. It has also gained retail share every month this year, executives said.

Industry-wide sales for September face an unusually easy comparison to 2009 when the auto sales rate was an anemic 9.2 million vehicles.

That exceptionally weak sales rate represented what analysts called a “hangover” from the expiration of the US government’s popular cash-for-clunkers sales incentives a month earlier.

For that reason, many analysts will look at the comparison between September and August sales rates for a better sense of the trend.