The uptrend in HKD rates has started to ease. The negative 1M HIBOR-SOFR spread has already widened from around -70bps at end-2Q to around -100bps lately. At this juncture, investors should watch for: 1) receiving opportunities against USD counterparts; and 2) steepening of the HKD IRS curve.
First, economic momentum has eased entering 2Q. GDP contracted by 0.6% QoQ. Aside from external trade, economic activities including consumption, tourism, and investment have lost some traction. Loan growth, which reached 6.2% YoY in June, may start to ease entering 2H. Lingering geopolitical conflicts and decelerating China growth are clouding investment sentiment.
Second, recent Mainland capital-control and taxation measures are curbing demand for Hong Kong assets. These include: 1) a crackdown on targeted brokerages and tighter investment-account opening requirements in May; 2) a 20% offshore trust tax announced in July; and 3) a 20% tax on insurance returns announced this week. The Hang Seng Index fell by 1.5% yesterday, dragged mainly by financials and real estate stocks. If asset prices soften, lower collateral valuations could translate into weaker HKD borrowing demand.
Long-end HKD rates, however, should ease at a slower pace. Ongoing infrastructure investment for the Northern Metropolis will keep long-end HKD bond issuance buoyant.
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E & S Macro StrategyGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates, Digital Assets or Commodities)[1]
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