KGI Asia Commentary

Hang Seng Index fell 342 points on Tuesday

The Hang Seng Index fell 342 points or 1.7% to 19,617 on Tuesday. HSTECH fell 137 points or 3.5% to 3,824 and HSCEI fell 131 points or 2.0% to 6,601. Daily market turnover was HK$106.6bn.

U.S. stocks end lower on Tuesday as investors’ bank fears return

U.S. stocks fell on Tuesday as earnings from First Republic Bank reignited concerns about the broader industry. The Dow Jones Industrial Average fell 344.57 points, or 1.02%, to 33,530.83. The S&P 500 fell 1.58% to close at 4,071.63. The Nasdaq Composite fell 1.98% to close at 11,799.16. First Republic Bank reported mixed first-quarter results, showing that its deposits plunged 40.8% year-on-year, far exceeding market expectations. The bank plunged 49% to a record low. The uneasiness reappeared. The report soured sentiment toward regional banks, with the S&P Regional Bank ETF (KRE) falling more than 4%. Meanwhile, United Parcel Service (UPS) reported first-quarter results that missed revenue and profit expectations, and the delivery company warned that it expects sales to remain under pressure, sending its shares down nearly 10%. Shares of PepsiCo bucked the trend and rose more than 2%, after the company reported quarterly earnings that topped expectations, boosted by higher prices. 3M Co ended lower despite reporting earnings that beat Wall Street expectations and announcing plans to cut about 6,000 jobs. McDonald's and General Motors were also down, despite better-than-expected quarterly results. The mostly disappointing quarterly results sparked renewed volatility, sending the CBOE Volatility Index, known as the fear gauge, sharply higher.

Yellen warns the failure to raise debt ceiling would cause catastrophe

U.S. Treasury Secretary Yellen said in a prepared speech on Tuesday that a U.S. debt default would trigger an "economic and financial catastrophe" and stressed that actions to raise or suspend the debt ceiling should be "unconditional." "In my assessment -- and that of economists across the board -- a default on our debt would produce an economic and financial catastrophe," Yellen said in remarks Tuesday. Among the potential consequences she listed were higher repayments on mortgages, auto loans and credit cards, while businesses could see credit markets deteriorate. The federal government also may not be able to distribute relief payments to millions of Americans, including those who rely on Social Security. "The solution is simple: Congress must vote to raise or suspend the debt limit. It should do so without conditions. And it should not wait until the last minute," In the long run, a default also permanently increases the cost of borrowing, making future investments potentially more expensive.

Hong Kong Stock Connect had a net inflow of HK$2.10bn on Tuesday, of which China Mobile (941) had the largest net inflow, reaching HK$0.82bn; followed by HSCEI ETF (2828). SMIC (981) recorded the largest net outflow at HK$0.22bn, followed by BYD (1211).