We're not in the clear yet

HSBC Holdings has reported first-half pre-tax profit of more than US$11 billion (HK$85.8 billion). The result certainly exceeded the best market predictions.

Together with other external factors, it's likely the unexpected result will help to spur stocks higher in the short term.

But it would be unrealistic to suggest it's time to sing party songs that everything is going to be all right after the drag in recent months. I'm not a scaremonger, but I prefer to remain cautious for some simple reasons.

First, the unexpected improvement in HSBC's first-half results had a lot to do with write-backs from previous provisions for its US business since the start of the global financial crisis.

Its loan impairment charges and credit risk provisions are now at their lowest level since the crisis began - down US$6.4 billion to US$7.5 billion. Without the write-backs, profits would be halved.

Second, caution has to do with the real economy. How the local market fares is subject to two major forces: the mainland and the United States. The latest economic data released by each country - now being the world's two largest economies - isn't particularly encouraging. China reported its weakest manufacturing data in more than a year, revealing a decrease in the purchasing managers' index gauging industrial activities. The government-backed Federation of Logistics and Purchasing said PMI fell to 51.2 in July from 52.1 in June. An HSBC analysis suggested the mainland PMI slipped below the watershed of 50 to 49.4 in July, from 50.4 in June.

A PMI figure above 50 is usually taken as a sign of expansion, and a number lower means contraction.

It's clear that China's economy is slowing down, with some observers predicting growth may even drop below 8 percent in the final quarter, after jumping nearly 12 percent in the first quarter.

Could it fall lower? For a developed economy, a smaller growth would be fine. But it could bode ill for China if the figure continues to slide. I would expect the central government to take action to prevent this from occurring.

Perhaps this caused talk to abound in the A-share market that Beijing would relax its clampdown on property, therefore sending the market surging ahead of the expected relaxation.

Then, there's the US factor. Is there a lot of good news to be found there? I'm afraid not. The American economy also slowed in the second quarter, as higher unemployment eroded consumer spending, leaving the rebound dependent on business investment.

It forced US Federal Reserve chairman Ben Bernanke to warn the economic outlook was uncertain, and recovery wasn't as strong as initially expected.

Maybe the only good news is the upcoming US mid-term elections. As in most election years, everything will be done to give voters pleasant feelings.

By now, it's widely expected interest rates will be kept at crisis levels despite talks of austerity in other countries. Not only will stock markets be hit by hot money, so will property.

But, as I've said, there's the real economy to worry about. One should keep an eye on this while exploring the financial markets.

英文虎報
Central Station | By Mary Ma