HK shares to extend rally on Fed's steady stance

HONG KONG, June 26 (Reuters) - Hong Kong shares are expected to extend the previous session's rally on Thursday, boosted by a technical rebound in local property counters on reduced expectations for a rate hike in the United States.

The U.S. Federal Reserve held rates steady overnight and boosted optimism among investors by saying the downside risks to growth appeared to have diminished somewhat.

"Valuations in Chinese stocks are viewed as being very attractive and we have seen the mainland market looking up in the past few days. This trend should continue," said Steven Leung, director with UOB Kay Hian.

Refiners and airlines may find some respite as crude oil fell more than $2 overnight after U.S. weekly data showed crude inventories in the world's top consumer rising as high fuel prices continued to erode demand.

U.S. stocks rose on Wednesday as oil prices retreated and after the Fed eased investor concerns about an aggressive rate hike.

The Hang Seng Index .HSI closed Wednesday's truncated session 0.8 percent higher at 22,635.16 but gains were capped by a 2 percent decline in bourse operator Hong Kong Exchanges & Clearing (0388.HK).

UOB Kay Hian's Leung expects the Hang Seng Index to advance another 500 points and end the first half firmly above 23,000.

STOCKS TO WATCH

* Steelmakers will be in focus on reports that China's government and steel industry officials are considering a boycott of iron ore imports from Australia's BHP Billiton (BLT.L) (BHP.AX) after it demanded more than the 96.5 percent price hike snagged by Rio (RIO.L) for term iron ore in fiscal year 2008. [ID:nSYD334913]

* Shaw Brothers 0080.HK reiterated that its controlling shareholder, Sir Run Run Shaw's holding firm, was still in discussions about a stake sale but had reached no decision.

The stock shot up 12 percent on local media reports on Wednesday that said prospective buyer Yeung Kwok-Keung, chairman of property developer Country Garden (2007.HK), had secured a loan to finance the HK$12.5 billion acquisition.

* Citigroup upgraded HKEx (0388.HK) to buy from sell, saying investors were overlooking products in the pipeline such as exchange-traded funds and the imminent launch of depositary receipts.

Stock in Asia's largest listed bourse operator dropped to its lowest level this year after investment banks, including Morgan Stanley, warned that dwindling turnover during a market downturn no longer justified its lofty price.

* Merrill Lynch cut its rating on Li & Fung (0494.HK) to underperform from neutral, saying a worsening U.S. consumption environment would pressure margins.

Merrill lowered its target on the firm's share price by 24 percent to HK$24.73 and advised a switch to fashion chain Esprit (0330.HK) for its more defensive growth profile and more reasonable valuations. -----------------MARKET SNAP SHOT @ 00:02 GMT ------------------

INSTRUMENT LAST PCT CHG NET CHG S&P 500 .SPX 1,321.97 0.58% 7.680 USD/JPY JPY= 107.82 -0.01% -0.010 10-YR US TSY YLD US10YT=RR 4.096 -- -0.006 SPOT GOLD XAU= $884.65 -0.07% -0.650 US CRUDE CLc1 $134.58 0.02% 0.030 DOW JONES .DJI 11811.83 0.04% 4.40 ASIA ADRS .BKAS 154.17 1.17% 1.79 ---------------------------------------------------------------- > US STOCKS-Market up on Fed rate pause, oil; RIMM drops late[.N] > Oil falls on US inventory build, weak demand [O/R] > FOREX-Dollar down as Fed fails to give strong rate signal[USD/] > Bonds flat as rate-hike fears abate after Fed [US/] > Gold ends lower on oil losses as Fed holds rates [GOL/] > SE Asian Stocks-Mostly end higher, led by banks [.SO]

. (Reporting by Parvathy Ullatil; Editing by Anne Marie Roantree)