Stocks in Hong Kong and Shanghai retreated on Friday morning as liquidity tightened ahead of Agricultural Bank of China's initial public offering, with Chalco down after it cut spot alumina prices to deal with falling demand.
The benchmark Hang Seng Index was down 1.38% or 277.57 points or 1.38% at a three-week low of 19,851.42 at midday, below the key 20,000 support level for the first time since June 15.
The China Enterprise Index of top locally listed mainland stocks was down 2.09% at 11,226.5.
"Sentiment is now very weak with a lot of fear," said Conita Hung, head of equity research at Delta Asia Financial Group. "On top of weak U.S. data, you've got the AgBank IPO that is sapping liquidity out of the market."
Agricultural Bank of China's [ABC.UL] Shanghai and Hong Kong IPO could raise up to $20.2 bln when it is listed later this month, just a shade less than Industrial and Commercial Bank's record $21.9 bln IPO in 2006.
Aluminum Corp of China's listed unit Chalco was down almost 3% in Hong Kong to a 14-month low after it said it had cut spot alumina prices by 7% since Thursday, reflecting weakening demand amid wider fears about the global economy.
Most of the Hang Seng Index's constituents lost ground on Friday morning. Only defensive plays such as Hong Kong & China Gas Co and Li Ka-shing's Cheung Kong Holdings ekeing out small gains of less than 0.5%.
Market players were also sidelined ahead of Friday's U.S. jobs report, after U.S. private sector employment rose by a paltry amount in June, underscoring concern about the weak labour market and a worsening economy.
Most charts point to stocks being oversold, with the Hang Seng Index's MACD having entered bullish territory since late June, and the slow stochastic fall into oversold territory of below 20 for the first time since May.
The traditional inverse correlation between the U.S. dollar and emerging market stocks such as Hong Kong's also strengthened, amid a rebound in the greenback ahead of the three-day Independence Day weekend in the United States.
"If Europe stabilises, we may see some upside in the third quarter," said Hung at Delta Asia. "In the meantime, I will stick to more conservative plays like telecoms and Chinese domestic consumption stocks."
SHANGHAI SLIPS
In Shanghai, China's key stock index was down 0.7% by midday, with tight liquidity shrinking demand for A shares and concern over slowing economic growth in the second half of the year weighing on investor sentiment.
China's manufacturing data released on Thursday was weaker than expected, easing inflation expectations for the market but analysts noted anxiety that this year's harsh controls to rein in the country's economy from overheating will dampen growth.
The benchmark Shanghai Composite Index ended the morning at 2,357.3 points, after dropping to a 15-month intraday low.
The market has lost 28% of its value in the past six months and is one of the world's worst performers, second only to Greece. The index is down 7.7 percent so far for the week.
"Right now investors are not worried about inflation. They are more worried about slower growth in the second half of the year," said Wen Lijun, analyst at Nanjing Securities.
Liquidity pressures have been weighing on the index, with a recent squeeze in money markets and Agricultural Bank of China's mammoth IPO sapping demand for A shares.
Analysts said they expected the market to find support at the psychologically key 2,300 point level but cautioned that this may not be rock solid given that the previous threshold of 2,500 points eventually gave way.
"Today, electrical, pharmaceutical and coal stocks are all putting a lot of pressure on the index. Coal prices are looking cheaper but still not at their bottom," said Wen at Nanjing Securities.
Property stocks staged a slight rebound with Shanghai's property sub-index up 0.8% and heavyweight developer Gemdale up 1.2%.
Losing stocks outnumbered gainers 720 to 162, while volume rose to 25 bln yuan ($4.9 bln) from Thursday morning's 23 bln yuan.
