A storm warning is in effect for Hong Kong, but it won’t interrupt trading. The Hong Kong Observatory has issued an Amber Rainstorm Warning. Hong Kong’s rain warnings are classified into three levels: Amber, Red, and Black. An Amber alert means heavy rain is possible and could increase to the more serious Red or Black levels. Low-lying areas might experience flooding, so key agencies will be ready to respond.

Severe Weather Response Levels

Red and Black warnings indicate heavy rain that can lead to flooding on roads and traffic issues. These warnings prompt a full response from government departments and service providers to handle the severe weather. Right now, the Amber alert won’t affect trading. Since 2024, Hong Kong’s securities and derivatives markets, including Stock Connect trading, derivatives holiday trading, and after-hours trading, continue to function as scheduled, even in severe weather. With this new policy, the risk of market shutdowns is no longer a concern. We will focus on secondary effects of the storm, such as its impact on economic activity and investor confidence. This means we are now tracking the market’s reaction to disruptions rather than the decision to stop trading.

Market Impact and Volatility

We expect implied volatility to rise if the Observatory issues a stronger warning. The Hang Seng Index has already shown swings of over 5% in the last month due to economic news from mainland China. A severe weather event could trigger another spike in volatility, so we are looking to buy straddles on HSI futures to profit from significant price movements. We are also identifying sectors likely to be affected by flooding and transport disruptions. With Hong Kong’s retail sales dropping by 14.7% year-on-year in April 2024, we believe that consumer stocks and property management companies could face further pressure. Therefore, put options on these stocks seem like a solid strategy for the coming days. One uncertainty is market liquidity if a Red or Black storm signal is issued. Even with electronic trading, many institutional and retail traders might focus on personal safety, which could lead to fewer orders in the market. This low volume could result in exaggerated price movements, causing sharp and unpredictable swings that we need to be ready for. In the past, markets typically rallied after a typhoon cleared and exchanges reopened. However, with the new arrangement that keeps the market open, this clear trigger has disappeared. Instead, we anticipate a longer period of negative sentiment that aligns with the storm’s impact on the city rather than a quick recovery. Create your live VT Markets account and start trading now.

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