Federal Reserve Chair Kevin Warsh stated at the Jackson Hole global central bank symposium on August 28 that inflation remains too high, prompting CME FedWatch data to show the probability of a September rate hike climbing to roughly 57%. On September 1, Hong Kong stocks extended their recent weakness, with the Hang Seng Index sliding more than 1% at one point, putting the 25,000-point support level under threat.

According to industry insiders interviewed by reporters, the risk of a "second dip" for Hong Kong stocks persists, driven not by the largely settled interim earnings season but by marginal shifts in market liquidity. The elevated odds of a US rate increase, combined with the possibility of the Bank of Japan continuing to tighten policy, could reignite carry-trade unwinding and deleveraging. Meanwhile, a slate of massive fundraising initiatives in the Hong Kong market is also weighing on liquidity.

Rate hike speculation rattles Hong Kong stocks

On August 28, Warsh said inflation is "still too high," and unless there is confidence that underlying price pressures are moving decisively and quickly toward the 2% target, "there is more work to do." The remarks were widely interpreted as hawkish, reigniting expectations for a September move.

Wen Tianna, chief executive of Boda Capital International, told reporters that the rekindled prospect of Fed tightening, including a potential follow-up in December, creates short-term pressure on Hong Kong stocks, though a second dip is not inevitable. Rising rate expectations push US Treasury yields and the US dollar higher, directly compressing valuations in Hong Kong, especially for tech and growth names. Given the linked exchange rate system, local liquidity is highly sensitive to Fed policy, and the August pullback in the HSI already reflects this strain on risk appetite.

That said, Wen noted that interim results from major index constituents have largely been released, removing much of the earnings uncertainty. Valuations remain relatively low, and with some long-term foreign capital returning and policy support from the mainland, there is a degree of cushion. He expects clear market divergence ahead: high-dividend and banking stocks in defensive sectors may hold up better, while richly valued tech and property-related names face heavier pressure. Select AI infrastructure plays with tangible monetization capacity could still forge independent trends.

However, Yu Fenghui, an advisor at the Hong Kong Stock Exchange 100 Research Center, argues that rising Fed rate expectations are a systemic negative for Hong Kong stocks, with a clear and direct transmission channel. Because the Hong Kong dollar is pegged to the US dollar, rate speculation lifts the local risk-free rate, raises the discount rate for Hong Kong assets, and compresses the overall valuation benchmark. A stronger dollar attracts capital flows back to the US, accelerating the reduction of foreign exposure to Hong Kong equities, and as a typical offshore market, Hong Kong's funding side takes the first hit.

On the other front, while interim results have removed fundamental uncertainty, that alone does not rebuild upward momentum. Cen Zhiyong, an analyst at Wutong Research Institute, said that after earnings are published, share prices have largely priced in the information. A Fed hike would hit rate-sensitive sectors such as Hong Kong's property segment. Large-cap tech companies engaging in massive refinancing and IPOs are stoking worries that AI-related capital expenditure is a "bottomless pit," prompting investors to reposition by selling some tech holdings to deploy capital elsewhere.

Wu Lixian, a strategist at China Everbright Securities International, told reporters that after the earnings season winds down, the market's focus may shift to external factors such as US monetary policy and mainland economic performance. Investors will also digest what the results reveal about underlying conditions. Over the past month, most legacy internet platforms posted lackluster earnings, dragging down related shares on the first trading day of September. Recent news of financing by Alibaba (09988.HK) has also stoked concerns about whether other major tech companies might tap the market for funds.

Debate swirls over potential second dip

Wen Tianna expects a possible second dip for Hong Kong stocks, but with limited depth. If upcoming US employment or inflation data further support a rate increase, or if a hike lands alongside hawkish guidance, the HSI could see another technical pullback. In the near term, Hong Kong stocks are likely to remain weak and range-bound, with rate-sensitive sectors seeing heightened volatility. Over the medium term, the path depends on the Fed's actual moves and mainland economic signals. Investors should watch upcoming US nonfarm payrolls and inflation figures, control positioning, tilt toward defensives and fundamentals-backed opportunities, and avoid chasing overvalued targets.

Yu Fenghui said the risk of a second dip remains, triggered not by corporate earnings but by liquidity. If the Fed raises rates in both September and December, combined with yen carry-trade unwinding pressure from BOJ moves, Hong Kong stocks face a comprehensive liquidity drain. Current valuations are low, but a valuation floor is not a price floor. In a rising-rate environment, solid profits only slow the pace of decline, not prevent it. Even strong earnings cannot withstand the squeeze from higher global funding costs. He advises investors to keep positions in a defensive range, avoid chasing rebounds, and continue shunning high-valuation growth stocks. Should a second dip materialize, it may be a chance to build positions gradually in high-dividend, low-volatility, cash-flow-certain names. Until a market interest-rate inflection is confirmed, Hong Kong stocks lack the conditions for a trend reversal.

Wu Lixian noted that since August, the HSI has spent most of its time between 25,000 and 26,000 points. September may open within that band, but the index could first test the 25,000 support level as rate concerns linger. Investors should also monitor mainland economic data to see whether growth momentum recovers to a more favorable level.