Blue chips lead China stocks ahead of MSCI review

The China A50 Index is having a field day ahead of Tuesday’s MSCI annual review. The Index smashed past key 15,000 points, rising 4.8% at the start of the week.

China Stock databoard
Source: Bloomberg

Telecommunications and financials led the upsurge, with the Bank of China limiting up today (+10%).

Trading volume was significantly higher, with the amount of units that exchanged hands around 50% higher than its 30-day average.

The focus on MSCI decision overshadowed the soft trade reading, which continues to suggest that external and domestic demands remain weak.

On the other hand, traders are buying blue-chip stocks at the expense of smaller-cap counters.

The Shenzhen Composite closed below 3000 points, dropping 1.7%, dragged by a 4.4% tumble in the ChiNext Index. The ChiNext had given back almost 300 points in the last three sessions, and pulled back 6.8% on approach of the 4500 handle.

Apart from the attention surrounding the MSCI verdict, retail investors have bought large-cap A-shares owing to speculations that Chinese inflation numbers, due on Tuesday, may reflect the softening growth momentum.

This provided the scope for People’s Bank of China to come out with more stimulus. The market is looking for a slight improvement in the PPI reading at -4.5% year-on-year from a contraction of 4.6% year-on-year in April.

It may be prudent to exercise a great deal of caution amid the wide swings characteristic of the Chinese equity markets. Today’s rally is likely to be driven more by retail demands with most large traditional funds opting to trim positions ahead of event risk. We expect to see more volatility in Chinese equities on Tuesday and the direction could go both ways.

STI may see more downsides

Singtel and Noble group remained one of the most active stocks on Monday though both came under pressure at the start of the week. Meanwhile, we see some bargain demand in CDL counter, which rose over 1% as of 4.20pm. 

CDL shares fell 4.1% last Friday on news that it will be removed from the FTSE Global Real Estate Index, which will take effect on Friday 19 June close. We could still see some selling pressure closer to the deletion date.

Nonetheless, external uncertainties concerning expectations of the start of the Fed rate hike, Greece’s bailout negotiations and the volatile China markets may keep Singapore shares under pressure.

The Straits Times Index continued to trade below its 200-day moving average, with a downward bias. A close below 3300 will bring 2015 lows of 3267.89 (7 January) into focus.

USD drops on Obama comment

The greenback came under pressure in early European hours on news that US President Obama commented that the strong dollar would posed a problem. I mentioned in today’s morning note that the magnitude in the post-payroll USD upmove is not as large as expected.

The current pullback suggests that Friday’s rebound lacks legs to stand on. However, the material data to watch this week will be Thursday’s retail sales numbers. Nevertheless, the media blackout of Fed speakers ahead of next week’s FOMC meeting mean that the market will focus on data to speculate on Fed’s next move, and by extension, the dollar’s direction.

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