Hong Kong shares had their worst day in a month on Friday, with the resource sector leading a reversal of Thursday's gains and more weakness looming as the benchmark ended below a chart support level.
Comments from St. Louis Federal Reserve President James Bullard crimped expectations for quick stimulus action from the Fed, a day after those hopes were raised following the release of minutes from its latest meeting.
The "risk-off" sentiment strengthened Friday's focus on the corporate earnings season, which has brought largely unfavorable results. Hopes of any quick earnings recovery were already set back on Thursday by a weak private survey of Chinese manufacturing activity in August.
The Hang Seng Index closed down 1.3 percent at 19,880, below the 20,000 level for only the third time in three weeks and the lowest in that timeframe. For the week, the index lost 1.2 percent, its worst showing in four weeks.
The Shanghai Composite Index of more than 950 companies shed 1 percent on the day and 1.1 percent on the week to end at its lowest close since March 2009. The CSI300 Index of the top Shanghai and Shenzhen listings shed 1.2 percent on the day and 1.6 percent this week.
Volume in Shanghai stayed lackluster despite better money supply conditions in the mainland. Hong Kong turnover declined from Thursday and was some 10 percent below its 20-day moving average. Short interest accounted for 12.2 percent of total turnover, the highest in more than a week.
"I don't see people doing a whole lot in the market, most are just being defensive and playing off individual stocks," said Francis Cheung, CLSA's China-Hong Kong equity strategist.
"China is more about timing. It's about when we get more policies...because things are already bad," Cheung added. "I don't see much more easing...until the political transition is complete, so there's a bit of a policy paralysis until then."
The Chinese resources sector was among the top drags ahead of key earnings from coal producers and after Australia intensified a debate on whether the decade-long bull run in commodities has ended, as data showed China heading for the slowest pace of growth in a decade.
China Shenhua Energy Co Ltd, the biggest coal producer, dived 3.5 percent ahead of its earnings after markets close on Friday. In 2012, the stock is down almost 13 percent.
PetroChina, China's dominant oil and gas producer, slipped 0.6 percent after posting a forecast-lagging 21 percent decline in second-quarter net profit after markets closed on Thursday.
Friday's fall took PetroChina into the red for the year. It is now down 0.2 percent in 2012, compared with a12 percent slump for China Petroleum and Chemical Corp (Sinopec) and an 8.9 percent gain for CNOOC Ltd.
But CNOOC declined 1.1 percent on Friday, deepening its weekly losses to 5 percent, after posting on Tuesday first half profit that slid twice more than expected while slashing its dividend by 40 percent.
CNOOC declined 1.1 percent on Friday, deepening its weekly loss to 5 percent. During the week, the company reported first half profit that slid twice as much as analysts expected, and it slashed its dividend by 40 percent.
Sinopec shed 2.6 percent ahead of its first half corporate results on Sunday. It is currently trading at a 10 percent discount to its historical median 12-month forward earnings multiple and a 24 percent discount to its 12-month forward price-to-book multiple, according to Thomson Reuters StarMine.
CHINA BANKS WEAK, CCB NEXT TO REPORT ON SUNDAY
Bank of China shed 1.3 percent to HK$2.95, a level that has served as chart support for about a month, after posting its weakest quarterly profit growth in three years.
In a note to clients dated Aug. 23, JP Morgan analysts said earnings growth at Bank of China was weak on fee contraction, although net interest margins and asset quality are bigger drivers in the long term.
Investors have returned to selected Chinese banks in the past month and a half, looking to leverage returns off its historically low valuations and high dividend yields moving into the earnings season.
Despite recent gains, the sector is still an underperformer on the year. The longer-term outlook remains murky on bad debt fears.
Beijing's two recent rate cuts also involved adjustments to lending and deposit rates that are expected to squeeze banks' interest rate margins and hurt profitability.
China Construction Bank, the next to report among the "Big Four" on Sunday, slipped 1.9 percent on Friday and is down 3 percent for the year. Bank of China is up 2.8 percent in Hong Kong in 2012, outperforming its rivals.
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