Hang Seng index enters a period of stable disequilibrium

The Hang Seng index nosedived on Wednesday as investors braced for a new normal in the market. The closely-watched Hong Kong index retreated to the key support at H$20,000, as global equities suffered a major meltdown. It has pulled back by more than 11% from the year-to-date high.

China growth and Fed statement

The Hang Seng index pulled back sharply as investors reflected on the ongoing Communist party congress in Beijing. In a statement, the party said that they expect the economy to grow by 5% in 2023 after it expanded by 3% in 2022. This growth forecast was seen as being relatively modest compared to its historic standards. 

The other main catalyst for the Hang Seng was the latest statement by Jerome Powell, the Federal Reserve Chair. In a statement on Tuesday, Powell reiterated the extremely hawkish view that the Fed will continue fighting the inflation battle in the coming months. 

After his statement, analysts started pricing in a situation where the Fed hikes rates by 0.50% in the coming meeting. If this happens, the Fed will likely see the terminal interest rate reach 6% later this year. This is much higher than what analysts were expecting.

The Fed has also committed to maintaining interest rates higher for longer than expected. These actions will impact Hong Kong, where authorities need to maintain a peg of their currency. With the US dollar index surging, there is a likelihood that the HKMA will continue to intervene in the financial market. 

It was a sea of red in the Hang Seng index as all stocks plunged. CSPC Pharma was the worst performer as the shares plunged by more than 6.11%. Country Garden Services shares retreated by over 5.87% while Longfor and Country Garden Holdings fell by over 5%. Tech stocks like Meituan, Xiaomi, JD, and, Alibaba Health also plunged.

Hang Seng index forecast

On the daily chart shows that the Hang Seng index has been in a strong bearish trend in the past few months. It has moved below the 23.6% Fibonacci Retracement level while the 50-day and 25-day exponential moving averages (EMA) have made a bearish crossover pattern. The index has declined below the Ichimoku cloud. 

Therefore, the index will likely continue falling as sellers target the 50% retracement level at H$18,670, which is about 7% below the current level. A move above the key resistance at H$20,850 will invalidate the bearish view.