The weaker dollar had a significant impact in supporting equity-market sentiment on Monday with small-caps gaining support on Connect hopes, but weak oil prices were important in limiting gains.
US equity indices lost ground on Monday with a round of profit taking following the sharp gains seen last week. The overall equity-market trend was less favourable and oil prices were subjected to notably choppy trading.
The dollar maintained a generally corrective tone, although losses were limited and there was renewed support later in the US session. The yuan was fixed stronger for the second successive day, which provided some net relief surrounding overall currency trends.
There was still an important element of underlying caution surrounding the dollar with Hong Kong competitiveness remaining an important background concern given that the US currency remains close to 14-year highs on a trade-weighted basis.
There was optimism surrounding potential capital flows into the Hong Kong market once the Shenzhen-Hong Kong Connect is launched on December 5th, which underpinned the market.
After opening lower, the Hang Seng index strengthened significantly in early trading and this has been a consistent feature over the past few sessions, increasing speculation of mainland inflows.
There was a gradual retreat over the remainder of the day with a dollar recovery tending to draw funds away from equities, especially with choppy trading in oil prices, and the index edged lower in the final hour of trading.
At the close, there was a decline of 93.50 points and 0.41% at 22,737.07, while the Hang Seng China Enterprises index declined 0.30% on the day. There was a strong advance for the Hang Seng Utilities sector with the other sectors in negative territory.
Trends in oil prices and the dollar will continue to have an important impact on equity markets and there is a high risk of further choppy trading conditions, especially with the OPEC meeting on Wednesday.