Hong Kong stocks rebounded smartly on Tuesday in response to Wall Street's strong performance as worries about the progress of the US economic recovery began to subside.

The new found confidence stemmed from US Federal Reserve (Fed) Chairwoman Janet Yellen's speech on Monday in which she said last Friday's disappointing jobs data had been outweighed by mostly positive trends. "I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones," she said.

But, the Fed will have other considerations in deciding whether to raise interest rates at its next meeting in mid-June. The key factor that can have a decisive influence on the Fed's thinking at this time is the United Kingdom's EU (European Union) referendum on June 23.

Yellen warned that a UK exit from the union could affect market sentiment leading to a sharp and abrupt change in investors' appetite for risks. She echoed the views of other politicians and economists in predicting that a UK exit, or Brexit, could hurt the US economy.

The latest opinion poll showed that a higher proportion of respondents favored an exit. The results have already depressed the value of the British pound against most other major currencies.

Hong Kong's externally oriented economy will be indirectly affected by the outcome of the referendum. What Hong Kong investors care most is how a UK exit would affect the US and global economies.

If the impact is minimal, then it really won't matter much whether the Fed will raise interest rates this summer or later in the year.

The consensus among economists and stock analysts is that a moderate rise in US interest rates will trigger an outflow of capital that could push up the cost of funds in Hong Kong. What investors need to watch out for is not when the Fed will raise rates, but rather its prognosis of the US and global economies.

(HK Edition 06/08/2016 page1)