Hang Seng Index analysis: bullish forecast amid China stimulus hopes

The Hang Seng Index continued its strong rally on Monday after a set of weak economic data from China raised the possibility of stimulus by the Chinese government. It was trading at H$26,460, a few points below the year-to-date high of H$26,580.

China stimulus hopes after weak data

The blue-chip Hang Seng Index has been in a strong uptrend this year, rising by over 37% from its lowest point in August and 42% from the January lows. 

This uptrend continued on Monday after China published weak economic numbers. A report showed the country’s unemployment rate rose to 5.3% in August from 5.2% a month earlier. 

The data also showed that China’s industrial production dropped to 5.2% from 5.7% in the previous month. This figure was lower than the median estimate of 5.8%, and was the worst figure the year-to-date.

Another report revealed that the country’s retail sales dropped to 3.4% from the previous 3.7%, while the fixed asset investment dropped to 0.5%. 

As a result, Chinese stocks continued rising as bond yields pulled back, with the 30-year falling to 2.175% and the 10-year slipping to 1.87%. This performance is mostly because investors are anticipating more stimulus from Beijing. In a note, a Mizuho analyst said:

“The high base from the fourth quarter of 2024 suggests that we probably will see fourth-quarter growth slowing more significantly, jeopardizing the government’s 5% growth target if no major stimulus measures rolled out.”

The Hang Seng Index also jumped as talks between the United States and China continued, with the 90-day pause expected to end in November. Officials from the two sides held talks in Spain, focusing on trade, TikTok, and the economy. 

Federal Reserve and HKMA interest rate decisions

The next important catalyst for the Hang Seng Index is the upcoming Federal Reserve interest rate decision, which always has an impact on Hong Kong.

Economists expect the bank to cut interest rates by 0.25% in this meeting as the labor market has deteriorated substantially in the past few months.

A Fed rate cut means that the Hong Kong Monetary Authority (HKMA) will respond by cutting rates on Thursday. It always does that because the Hong Kong dollar is pegged to the US dollar. These cuts may stimulate more gains in the stock market this year.

Most Hang Seng companies have done well this year, with Sino Biopharmaceutical soaring by 172% and Chow Tai Fook Jewelry being the top gainers with a 172% and 165% gain. CSPC Pharma has jumped by 127%, while SMIC roared by 100%.

Other top gainers in the index this year were companies like China Hongqiao, Alibaba Health, Alibaba, Hansoh Pharmaceuticals, JD Health, and Pop Mart.

Hang Seng Index technical analysis 

The daily timeframe chart shows that the Hang Seng Index has been in a strong uptrend in the past few months, moving from a low of H$19,238 in April to the current H$26,463.

The index recently moved above the important resistance level at H$24,856, its highest on March 19.

It has remained above the 50-day and 100-day Exponential Moving Averages (EMA), while the Relative Strength Index (RSI) and the MACD have all pointed upwards.

The Average Directional Index (ADX) has continued rising and moved to 14. Therefore, the most likely scenario is where it continues rising, with the next target level to watch being at $27,000. A drop below the support at H$26,000 will invalidate the bullish forecast.

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