The Hang Seng Index retreated slightly on Monday as geopolitical tensions between the US and Iran rose and after a report showed that China’s economy was struggling. It dropped to 25,402, slightly lower than this month’s high of 26,180.
Rising US-Iran tensions
There is a risk that kinetic action between the US and Iran will escalate after the US launched an attack against key targets in the Strait of Hormuz. The strike killed two people, who, according to CENTCOM, were laying mines.
In a statement, President Donald Trump threatened to blow up Kharg Island, where Iran exports most of its oil. Such a move would lead to a major escalation, with Iran warning that it would attack other energy infrastructure in the region.
Trump has warned of attacking Kharg Island in the past, only to back down after interventions from regional allies. These countries, including Saudi Arabia and the United Arab Emirates (UAE) are worried that such an attack would harm their energy industry.
Trump also considered taking the island, but judged that it would lead to hundreds or thousands of American troop casualties.
These tensions have led to a surge in oil prices, with Brent and the West Texas Intermediate (WTI) rising to $90 and $85, respectively. This rally will likely continue rising if the situation escalates.
China manufacturing production dropped again
The Hang Seng Index also retreated after a report showed that China’s business activity deteriorated in August. The closely watched manufacturing PMI came in at 49.8, slightly higher than July’s 49.2. A PMI reading of less than 50 is usually a sign that a sector is deteriorating.
A recent report showed that the economy expanded by just 4.3% in the second quarter, the worst performance since late 2022. This slowdown was driven by soft domestic demand and the prolonged property slump.
More data showed that retail sales and industrial production slowed last month. These developments are important for the Hang Seng Index because it is mostly made up of companies with large operations in Mainland China.
On the positive side, the weak numbers may push Chinese authorities to announce a large stimulus package.
BYD stock retreats amid rising competition
Meanwhile, the Hang Seng Index retreated as BYD shares dropped by nearly 5% after the company published its earnings on Friday. The results showed that its net profit rose to $1.2 billion, up by 30% from the same period last year. Revenue dropped by 3% in the quarter.
The company warned that the Chinese EV industry faces sluggish domestic demand that is characterized by soaring competition and rising costs for commodities and raw materials. This statement likely explains why the stock dropped after its earnings.
Other top laggards in the Hang Seng Index were companies like China Resources Land, Chow Tai Fook Jewellery, Xinyi Solar, and Longfor Group. Xinyi Solar stock dropped after the company announced a weak financial report during the weekend.
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