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Stronger China data could lower odds for more easing

Stable Chinese economic data and an improvement in credit lending could make space for Chinese policymakers to take a breather.

China Shanghai
Source: Bloomberg

Clearly, a lesser need to pump more liquidity into the financial system would dampen the ‘bad news is good news’ syndrome embedded in the Chinese equity markets. However, one needs to bear in mind that a data point does not make a trend.

Unless we see more signs of improvement in the Chinese economy and bank lending growth, I won’t hold my breath.

Retail investors seem unbothered by the relatively ‘good news’ data, acquiring more smaller-cap stocks after a very short consolidation period over the past few sessions.

The Shenzhen Composite climbed up to new record highs of 3100.94, which was helped by a sustained recovery in ChiNext. However, the market may exhibit some caution ahead of another batch of IPOs next Friday.

24 new share listings scheduled on Friday 19 June is estimated to freeze up to CNY 5.5 trillion (USD 886 billion) of funds, according to SWS Research. Guotai Junan Securities is expected to be one of the largest IPOs in China in five years, and looks to use CNY 29.7 billion (USD 4.8 billion) of the proceeds for working capital.

The Shanghai Composite shrugged off early selling pressures to close up at 0.3% today. The index remained above its 20-day and 50-day moving averages at 4781.7 and 4447.21 respectively.

95% of the index constituents are above their 20-day moving average, and 99% are above their 50-day moving average. Based on the 14-day RSI indicator, the proportion of stocks considered ‘overbought’ stayed below 30%, from around 65% in late May.

Noble rallies

Shares of Noble Group jumped the most in over 18 months, after sliding to an over six-year low earlier today. The emailed letter sent by Noble Chairman Elman to shareholders, pledging to ‘right the damage’ appeared to be behind the surge in trading volume and price of the embattled commodity trader.

Although it might be tempting to suggest that this could signal a recovery in Noble shares, it may be more prudent to step back and look at the bigger picture. Challenges to the commodity company still remained.

Negative risks of a falling profit margin, slowdown in commodity trading and corporate governance issues will continue to weigh on Noble notwithstanding the piecemeal measures taken to arrest the downward spiral. The market probably needs to see concrete measures to ‘right the damage’ before a sustainable rally can take hold. Otherwise, today’s rebound is likely to be short-lived.

We see another fair rebound in the Straits Times Index, with a move back above 3350. I did mention in my note yesterday (Wednesday 10 June) about the possibility of a technical bounce, even if the macro background does not necessarily back the move.

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