Hong Kong and China shares rebounded slightly on Friday but a heavy selloff in financials the previous day ensured both benchmarks ended lower for the week with eurozone worries still looming and some funds keen to sit on cash. The Hang Seng posted its second successive weekly drop as investors continued to take money off the table following last month's rally in Chinese shares with escalating worries about Italy and Greece providing little incentive for fresh buying.
The benchmark gained 0.9 percent on the day following Thursday's 5.3 percent and over-1000 point drop. For the week, the Hang Seng lost 3.6 percent. Trading activity on Friday fell nearly one-third from the previous day as a round of short-covering earlier in the day failed to spur funds to take fresh positions ahead of the weekend.
"In addition to the events in Europe, next week is a big week for US data and for Japan, which is likely to mean a week of choppy trading," said a trader at an American brokerage in Hong Kong. The focus is likely to be on macroeconomics once again for investors with Japanese and French GDP data in the early part of next week followed by US retail sales, industrial production and housing starts in the latter half.
Hedge funds were actively shorting on Thursday, driving the short-interest up to 9.1 percent of total turnover, compared with an average this month of 8 percent. A trader at an Asian brokerage said hedge funds "saw yesterday as an opportunity to get short", adding that long-only funds were also raising cash levels by selling positions. Some of those bets were covered on Friday.
On the mainland, the Shanghai Composite rose 0.1 percent to 2,481.1 supported in part by large-cap banking and energy shares. Those gains spilt over to Hong Kong, where shares of ICBC, among the heaviest losers in the sell-off, rose 2.1 percent. Smaller rival Agricultural Bank of China rose 3.5 percent. For the week, Shanghai's index was down 1.9 percent.
Signs of easing inflation in China have stoked optimism about selective easing in the country as the West's problems take their toll on China's exports. "European debt problems and the US economic slowdown may have begun to affect China's trade," said Alan Lam, Greater China analyst at Julius Baer in Hong Kong, pointing to weaker-than-expected exports last month.
Optimism about a year-end rally in Chinese shares, underperformers relative to Asia this year, drove a month-long rally starting in early October on hopes that authorities would start loosening their grip on the economy. In a sign of loosening, Chinese banks extended 587 billion yuan ($92.5 billion) in new loans in October, up from 470.0 billion yuan in September, evidence of "selected" policy easing by the government to support growth as inflation falls.
Bucking the market's move up on Friday, casino stocks in Hong Kong tumbled following the sharp drop on heavy volume for shares of Melco Crown Entertainment, which lost 11.9 percent overnight in the US. Wynn Macau dropped 5.6 percent, leading a broad sell-off across the sector. Galaxy Entertainment fell 6.9 percent and MGM China Holdings lost 4.9 percent.