Hong Kong Stocks Erase Selloff Sparked by National Security Law

(Bloomberg) -- In a sign of how forgiving markets can be, Hong Kong's Hang Seng Index is back to levels seen before China's shock move to crack down on dissent in the city.

The gauge has rebounded 5.9% this week on relief that the Trump administration didn't announce any serious retaliation in response to Beijing's move to impose sweeping national security legislation. Optimism that the global economy will recover quickly from the coronavirus pandemic is also helping fuel gains.

The recovery also shows that for traders, concern right now centers more on whether the U.S. will take steps that damage Hong Kong's position as a financial hub, through sanctions or revoking the city's special trading privileges for instance. U.S. officials previously said they could no longer certify Hong Kong's political autonomy.

The Hang Seng Index closed up 1.4% on Wednesday, surpassing its 24,280.03-point close from May 21, when the planned law became public knowledge after the equity market closed. The measure plunged the most in five years the following day.

Continued gains in the territory's stocks would be a propaganda boost for local officials, who are keen to show that the new laws would promote stability after last year's anti-government protests hurt the economy.

It's too early for traders to celebrate just yet. The Hang Seng is trading near its lowest level relative to MSCI Inc.'s global stocks measure in 17 years and local equities are cheap. There is a long way to go to quash the pandemic, while the risk of U.S.-China tensions escalating remains high. Trump may still announce more specific measures that target Hong Kong, and protests in the city may return.

“Stocks in Hong Kong may be a bit overbought,” said Steven Leung, executive director with UOB Kay Hian (Hong Kong) Ltd. “The virus is not completely controlled and protests are fueling concerns in the U.S. I think investors should be very cautious.”

But for now, the panic of last month, when the Hang Seng slumped almost 7% even as the MSCI All-Country World Index rallied, seems to be firmly in the rear view mirror.

The Hong Kong dollar on Wednesday traded very close to the strong end of its trading band.