``We are expecting it (the index) to recover in the coming week -- that is barring anything dramatic in the US,'' head of research Adrian Ngan at BNP-Prime Peregrine Securities said.

The Hang Seng Index closed down 130.61 points or 1.72 per cent at 7,445.96 on Friday, after clawing back some early losses which pulled the index to a low of 7,348.28. Over the week, the index lost 132.52 points or 1.75 per cent.

``The index tested support levels between 7,300 and 7,400 and looked well supported,'' Ngan said, adding resistance lay at 7,700.

On Friday, the share price of index heavyweight HSBC Holdings Plc fell to a two-year low of HK$136.00 before closing at HK$137.00.

The share, which had outperformed the index for most of the year, was now suffering from revaluationof the earnings stream of its many global parts.

``Fair value is around HK$137 to HK$142,'' analyst Arthur Lauat of DBS Securities said, adding the valuation would be subject to downward revision if earnings growth in the bank's US and UK operations slowed.

Analysts said they were not too concerned about the bank's Latin American assets, but about a further rise in non-performing loans in the bank's Southeast Asian portfolio.

While domestic factors may take precedence over external issues, the local market will remain watchful of trends on Wall Street and more fall-out from the Clinton White House sex and perjury scandal.

On Friday, the Dow Industrials gained 21.89 points or 0.28 per cent to close at 7,895.66, recovering just a bit of Thursday's more than 200-point fall. On the home front, Hongkong Telecommunications Ltd's announced intention to cut the salaries of its 13,800 staff by 10 per cent effective November 1 and the union backlash will weigh on market sentiment.

``This is the second stageof the deflationary cycle,'' chief regional economist Anthony Chan at HSBC Securities said. ``Other companies are certain to follow suit.'' The first stage was asset deflation, which had been seen in real estate and the stock market over the past year, and third stage was a fall in the cost of services, Chan said.

Hongkong Telecom, the largest employer in the territory after the government, said it was taking the action to cut costs and avoid further staff layoffs.

Unemployment in Hong Kong hit a new 15-year high of 5.0 per cent in the June-August period, the census and statistics department announced on Thursday.

Job insecurity was now a major factor in the slump in Hong Kong's property market.

Falling property prices, in particular large provisions for the decline in value of properties under development, will be a key factor in upcoming results announcements.

Sino Land will report its results for the year ended June 30, 1998. Analysts are expecting the company to report earnings of about HK$1.5billion after taking provisions of HK$1.0 billion for declines in the values of its development properties.

Red chip conglomerate China Resources Enterprises will report its first half 1998 results on Friday. Subsidiaries Ng Fung Hong and CR Beijing Land last week reported their results showing good growth in earnings.