Investors cut and ran yesterday, quitting the rally in the Hang Seng Index amid mounting speculation that the US central bank will soon fan inflation in a last-ditch bid to rev up growth.
The Federal Reserve will meet next week and is expected to unveil an asset purchase scheme which investment banks estimate could ultimately amount to between US$1 trillion and US$2 trillion. It has signalled recently that it will tolerate higher inflation levels if growth initiatives can reduce unemployment.
The central bank has already pumped US$1.7 trillion into the financial system and slashed lending rates to almost zero.
'People are afraid that the Fed will flood the market with so much money that it will spark inflation,' said Francis Lun Sheung-nim, general manager of Fulbright Securities. 'And the stock market has risen too much already [so] people are selling,' he added.
The Hang Seng Index registered its biggest one-day fall in four months, dropping 1.9 per cent, or 436.66 points, to 23,164.58. Lun expects it to slide below 23,000 in the near term.
The selling was across the board, dragging down all but two of the index's 45 stocks. Hong Kong Exchanges and Clearing lost 3.2 per cent and Bank of Communications fell 3 per cent. PetroChina slumped 4.3 per cent.
Other regional markets were also hit by selling pressure. South Korea's benchmark Kospi Index dropped 0.51 per cent, Taiwan's Weighted Index declined 0.63 per cent, and Australia's S&P/ASX 200 Index fell 0.85 per cent.
