The three major indexes of US stocks opened sharply higher on Wednesday, rising in the short term after the announcement of the Fed's interest rate resolution, followed by rapid declines one after another, and the Nasdaq closed slightly red at the end of the day. At one point, the Dow fell more than 400 points, with an intraday magnitude of more than 900 points.
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The Federal Reserve held its first interest rate meeting this year. The Fed announced after the meeting that members of the Fed Monetary Policy Committee FOMC unanimously decided to keep the target range of the policy rate of 0% to 0.25% unchanged, in line with market expectations.
What is the transmission path of the impact of Fed policy on the valuation of Hong Kong stocks?
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An increase in interest rates by the Federal Reserve will usually promote the appreciation of the US dollar, the nominal interest rate on US debt will rise, and the real interest rate on US debt will also gradually rise, eventually leading to a contraction in US dollar liquidity, and the Hong Kong dollar which implements the linked exchange rate will naturally face the pressure of depreciation.
In order to reduce the pressure on the devaluation of the Hong Kong dollar, the Hong Kong government can only control the amount of Hong Kong dollars in circulation on the market, that is, it is often said to control liquidity expansion or even shrink liquidity, resulting in a rise in the credit interest rate of the Hong Kong dollar.
The rise in the cost of credit, in turn, will depress the valuation of financial assets such as stocks and real estate, causing asset prices to fall.
When the price of assets denominated in Hong Kong dollars falls, it will increase the implied rate of return on the assets, to some extent, ease the impulse to convert Hong Kong dollars into US dollars, thereby reducing the depreciation pressure on the Hong Kong dollar. If you understand this logic, you will know.