Despite the recent overseas interest rate cuts, the Hong Kong stock market has yet to stabilize, primarily due to two internal liquidity issues: the implementation of new mutual fund benchmark regulations, which may lead to selling of some over-weighted Hong Kong stocks, and the substantial short-term capital demand in the Hong Kong market. While these narratives persist and have been reinforced during the market decline, their overall impact remains relatively limited. Attention should be paid to the upcoming U.S. non-farm payroll data, as a significant miss in expectations could reignite market rate-cut expectations, potentially improving sentiment and stabilizing the market.

**Key Takeaways** ⚑ **HK Market Update**: The Hong Kong market has not stabilized post-overseas rate cuts, mainly due to two liquidity concerns: mutual funds may sell Hong Kong stocks to align with new benchmark rules, and the market faces high short-term capital demand. While these factors are present, their impact is limited. ⚑ **Sector & Index Recommendations**: Internet (930604.CSI), Nonferrous Metals (931947.CSI), and HK Connect Non-Bank Financials (931024.CSI). ⚑ **Last Week’s Performance**: The Hang Seng Index fell 0.42%, while the Hang Seng Tech Index dropped 0.43%. The AH premium remained at 119.8. Financials and IT were the only sectors that rose, while energy led declines.

**Micro-Liquidity Trends** 1. Southbound capital saw its first net outflow in six months (-HK$3.4B), mainly from non-essential consumption. 2. Foreign investors net bought HK$2.6B via ETFs, nearing post-September 24 highs. 3. Local Hong Kong ETFs saw a net inflow of HK$5.1B, totaling HK$45.9B year-to-date.

**Hong Kong Liquidity Conditions** Overnight HIBOR: 1.71%; 3-month HIBOR: 3.03%. The USD/HKD rate is at 7.78, approaching the strong-side convertibility guarantee.

**Global Liquidity Shifts** - U.S. 2-year Treasury yield fell 36bps to 3.522%, while the 10-year yield rose 47bps to 4.182%. - The U.S. Treasury General Account (TGA) balance dropped by $10.27B to $805.8M, and ON RRP usage declined by $650M to $840M.

**Risks**: Economic data or policy disappointments, unexpected overseas policy tightening.

**Market Outlook** 1. **Liquidity Pressures**: - Mutual funds may rebalance portfolios to meet new benchmark rules, potentially selling Hong Kong stocks for A-shares. - High IPO demand (over HK$250B raised YTD) has strained liquidity, though December’s pace has slowed (~HK$10B). 2. **Mitigating Factors**: - Funds may adjust benchmarks to retain Hong Kong exposure. - Insurance capital remains a dominant force in southbound flows, supporting demand. - Regulatory scrutiny may improve IPO quality, attracting more capital.

**Sector Recommendations**: Focus on internet, nonferrous metals, and non-bank financials.

**Weekly Recap**: The Hang Seng Index fell 0.42%, with financials and IT sectors rising while energy lagged.

**Micro-Liquidity Details**: - Average daily turnover rose to HK$207.1B (72.8% percentile over three years). - RSI indicators (HSI: 42.6; HSTECH: 42.7) suggest neutral sentiment.

**Capital Flows**: - Local ETFs: HK$5.1B inflow (YTD: HK$45.9B). - Foreign ETFs: $263M net buying (total since 9/24: $14.44B). - Southbound: First net outflow in six months (-HK$3.4B), mainly to non-essential consumption.

**Valuations**: - Hang Seng Index P/E: 11.5x (3-year median: 10.1x). - MSCI China P/E: 12.4x (3-year median: 11.5x).

**Capital Demand**: December fundraising totaled HK$18.6B (IPOs: HK$9.8B; placements: HK$8.1B).

**Macro-Liquidity**: Hong Kong rates remain accommodative, with USD/HKD nearing the strong-side peg.

**Global Liquidity**: U.S. Treasury yields diverged, while TGA and ON RRP balances declined.