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What’s spiking my interest
Shanghai had its worst week since the height of the GFC last week with a 13.3% loss. However, stocks that have been loved by Chinese margin traders actually saw losses enter bear market territory as positions unwound – this is really spiking my interest.
Chinese investors currently have approximately US$365 billion on margin in stocks in Shanghai and Shenzhen (A-Shares). That’s a lot of cash in profit that wants to be cashed out sharpish!
The issue is depth screens. Will they thin on the bid side as margin cashes out? If they do that will trigger violent price action. It will also trigger stop losses and see disorderly selling (Think CSI 300 on 4 June).
Examples to be aware of include the Shanghai Construction Group – 34% of its shares are brought on margin (it is up 253.6% in the past 52-weeks). EGing Photovoltaic Tech Company had 44% of its shares bought on margin before shedding 21% last week (it is still up 109% over the past 52-weeks).
This is the concern then – there is so much profit gunning to be realised, so again will depth screens be able to fill the likely sell orders? Margin (when correctly used) is a useful and profitable investment tool. However, if everyone using it is on the same side - a crowded trade becomes a bloated trade fast.
Staying in China, the HSBC flash manufacturing PMI is expected to have contracted once again today. Estimates are for a print of 49.4 from 49.2 last month. It will bring more speculation of a fourth cut to rates (either reverse requirement ratios or benchmark interest rates) in eight months. This would hold up Chinese equities. However, the PBoC has been very quiet of late.
Grexit – no deal (yet)! But there has been a significant change from Athens. The SYRIZA party look like they are beginning to yield on pensions schemes (eg. eliminating early retirement benefits) as well as tweaking tax measures it has previously resisted, including a broad-based increase to VAT and some increases to corporate and personal tax rates.
The ECB, Eurozone Commission, EU finance minters and France like what they are seeing. Germany, though, is more muted on a deal. A further emergency meeting for Wednesday was announced this morning. However, the deal is being described as 'comprehensive and a basis to really restart talks’ – this coming from Jeroen Dijsselbloem.
The catch here that is Brussels and the European markets may like what they are seeing, but does Athens? Some political watchers suggest between 10 to 40 SYRIZA MPs may dissent when the proposal is voted on in the Greek Parliament, and a further 12 MPs from a junior coalition partner may also walk. SYRIZA has an 11 seat minority – the deal may not be accepted at home.
Grexit is far from over and the (arbitrary) deadline is now seven days away. Buckle up (most likely to the upside).
Ahead of the Australian open
We are currently calling the ASX up 24 points to 5634 - since the 10 June low the ASX has consolidated its position, adding 147 points. It appears its fortunes are changing, having lost 9.2% over the previous 10 weeks.
I continue to monitor the ASX’s underperformance versus the MSCI World index; it is still underperforming by 8.2% (was 9%). The gap has plenty of room to move to the upside here and the banks, Telstra and CSL are the ones that have begun carrying the ASX higher.