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Hong Kong the place to be

It’s all about China in Asia today, as the interest in Hong Kong equities continues to ramp up. 

Hong Kong
Source: Bloomberg

The volatility in the Hang Seng has been immense today with investors speculating on ‘fair value’ stocks. Following the significant rally in mainland equities over the past year, you always sensed something had to give and the latest move seems like it’s enough to see mainland equities cool and close the valuation gap.

Additionally, investment opportunities in China are limited and traders will be looking for new investment vehicles. Yesterday saw Hong Kong equities at a seven-year high and the entire southbound quota taken up. There has been a continuation of this trend today and the steam is certainly coming out of mainland equities as a result.

These days a key investment thematic is to get what policymakers or regulators are trying to achieve right, and from there getting the investment strategy right becomes easier. The Hang Seng traded over 7% higher with around half of the southbound quota taken up before shedding nearly half of the early gains. An expectation that a flood of mainland money is on its way to Hong Kong will keep equities bid in the near term, and I feel buying the dips will be the way to go until the government’s attitude changes.

Nothing new from Fed minutes

The Fed minutes didn’t really bring much fresh insight, but were certainly enough to see the greenback find some buyers. While the move in the greenback is somewhat surprising given most members feel economic growth has moderated since January, what drew most market participants’ attention was the deliberation over a June hike. All participants favoured removing the ‘patient’ reference and taking a more flexible approach on a meeting by meeting basis seemed unanimous.

Perhaps removing the ‘patient’ reference was a compromise to a later than June hike. This would balance out the doves and hawks in the committee; keeping everyone relatively happy. A slightly dovish twist was the fact that the meeting took place before the most recent payrolls reading which disappointed. However, it’s hardly a secret that Q1 data has been benign, and unless we see a significant snap back in Q2, then a June hike remains unlikely. Having said that, nothing has changed and lift-off is certainly going to be data dependent. In fact, key Fed members such as Ms Yellen and Mr Fischer have hinted towards lift-off occurring later this year. Additionally it seems the timing of lift-off will become less significant than the pace of tightening once lift-off occurs.

Plenty of FX trading opportunities

The greenback has managed to gain against the CAD, euro, AUD and JPY. This is the key theme in global markets right now as it tends to have a bearing on how equities trade. USD/JPY is back above 120.00 and this is underpinning gains for the Nikkei, which is flirting with the 20,000 barrier. The last time the Nikkei was trading above 20,000 was back in April 2000 and needless to say a break of this level will represent a significant psychological feat.

There are plenty of exciting trading opportunities in the USD crosses right now and the volatility in oil prices has played a big role in USD/CAD. With weakness in oil resuming amid rising inventories and given the high correlation between the CAD and oil, there could be fresh opportunities to go long the pair. At the same time the AUD seems to be biting off a bit more than it can chew against the greenback and traders will be eyeing fresh shorting opportunities in AUD/USD.

Firmer open for Europe

Looking ahead to European trade, it seems equities are in for a firmer open and I suspect the renewed weakness in the euro will play a role in this. On the calendar we have German industrial production and trade balance data. The UK will be on BoE watch, but nothing major is expected out of this meeting. In the US, unemployment claims will be the only significant release and will be tracked closely by analysts in the wake of the disappointing non-farm payrolls reading.

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