Hong Kong Stocks Tumble as US Yield Surge Hits Pegged Dollar

On Friday, the Hang Seng Index dropped by as much as 3%, recording its sharpest intraday decline since March 23. The city's dollar peg transmitted the surge in US yields directly into its financial system.

Normally, rising rates benefit bank margins, but this time financial stocks were at the forefront of the selloff. HSBC Holdings saw its shares decline up to 5.7%.

Why Hong Kong Bears the Brunt of the US Yield Surge

On Thursday, the 10-year Treasury yield reached a level not seen since 2002.

The Hong Kong dollar is pegged within a tight range to the US dollar. Consequently, an increase in US yields can tighten Hong Kong's financial conditions, regardless of its own economic requirements.

“Hang Seng index universe also gets additional headwinds from the US rate cycle channelled through the HKD peg.”

Homin Lee, senior macro strategist at Lombard Odier Singapore, made the comment in a Bloomberg report.

Asian banks have so far been shielded by wider margins. However, Leonid Mironov, a portfolio manager at Gavekal Capital, noted that a risk-off trade eventually spreads to financial stocks. Growing credit risk concerns increase that probability, he added.

During morning trading, Standard Chartered dropped roughly 5% and insurer AIA Group lost nearly 6%, as reported on Bloomberg's China Show.

Where Can Hong Kong Look for Support?

Not this week. Mainland Chinese markets remain closed until October 8 for the Golden Week holiday.

This halts southbound flows—purchases of Hong Kong shares by mainland investors—and reduces liquidity.

But the stimulus package announced by Beijing earlier this week disappointed investors, who had hoped for more. Additionally, a Bloomberg index tracking Chinese property developers declined by as much as 4.3%.

Technology stocks were stable in Taiwan and Japan, but Alibaba Group and Tencent Holdings dragged down the Hang Seng.

Mainland traders are set to return on October 8. Their buying activity will indicate whether Friday's drop was due to thin holiday trading or a sustained reassessment of Hong Kong's risk.

As the Federal Reserve continues its rate hiking cycle, the currency peg prevents Hong Kong from setting its own interest rate path.