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Thursday, July 11, 2019, 18:04
Outside the box
By Peter Liang
Thursday, July 11, 2019, 18:04 By Peter Liang

Although US Federal Reserve Chairman Jerome Power was deliberately vague about interest rates, his expressed concerns about the slowdown of the global economy and its implications for the US was enough to convince stock analysts and investors that a rate cut at the end of July was all but certain.

His remark in Wednesday Congressional testimony were widely taken to signal that a rate cut could come soon with more to follow later this year triggered a strong rally on Wall Street sending the Dow to historic highs. The Hong Kong stock market opened on a strong note with the benchmark index surging 350 points in the morning.

Reading from a prepared statement, Power told Congress that concerns about the strength of the global economy continue to weigh on the US economic outlook. “Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture reported heightened concerns over trade development,” he said, in apparent reference to the Sino-US trade dispute.

Powell’s cautionary comments stand in contrast to last week’s strong US job figures and the easing of trade tensions. Those developments earlier had many investors worried that the Fed might deemed rate cuts to be necessarily.

Now that the cloud seems to have cleared, Hong Kong investors were making a dash back into the market. Their interests have naturally focused on the interest rate sensitive property stocks which stand to benefit from the expected increase in demand for homes.

The impact of lower interest rates on banks is mixed. A reduction in borrowing cost has the potential of trimming banks profit margins. But Hong Kong banks can benefit from the projected rise in demand for mortgage loans, which are their major source of stable income.

A decline in interest rates is expected to depress the value of the US dollar and that of the Hong Kong dollar as the two are linked by the currency peg. A weaker dollar can help the local economy by enhancing the competitiveness of Hong Kong services and tourism sectors.


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