China holds back the bears

China markets received a reprieve on the last day of June as the government appears to be looking at ramping up the level of support for the under-sieged equities.

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Source: Bloomberg

Market internals looked stronger today in the Shanghai Composite, with trading volume picking up further compared to the 30-day average.

In addition, the number of companies that limit down, dropped drastically to just three (0.3% of total), from 271 (25%) in the previous session.

The fact that the Chinese government is increasingly vocal on the stock market shows they are keen to promote stability.

A raft of initiatives is currently being mooted, including a moratorium on IPOs, reducing stamp duty on share trading and fast-tracking the approval for local pension funds to buy equities. For the moment, it seems that investors are reacting positively to the slew of market-friendly news.

However, in the near term, these measures may not inspire a sustained rally amid continued unwinding of margin trades. Put differently, any support from the central bank and government may have a momentary effect on the stock market.

For now, worries about further unwinding of margin positions and whether it will drive the Chinese markets in the short-term remains. Still, one thing that is quite certain is if the market resumes its decline, we will likely see more supportive policies.

It is worthwhile to point out a key reason why the Chinese government is concerned about an unbridled fall in the stock market. The authorities are attempting to divert companies’ source of funding from the shadow banking sector to the capital markets, mainly stocks and bonds.

This is consistent with its efforts to curtail shadow banking activity and promote financial stability. A collapse in the equity markets will be a major setback for the mandarins.

Singapore rebounds

It is not often that Singapore stocks lead gains in the region. When the Straits Times Index (STI) rebounded strongly to over 1% in early trade, while regional bourses posted modest gains and China markets were in tatters, I was a little suspicious about the strong demand.

A couple of news and phenomenon may explain the outperformance. Firstly, economic data was fairly positive for the market. M2 supply continues to stabilise, whereas banks’ loans improved, driven by more lending to businesses. We saw good gains in Singapore banks, with DBS jumping almost 2% as of 4.57pm, while UOB and OCBC posted almost 1%.

In addition, short covering interests may have also pushed Singapore shares higher after the STI pierced through the key 3300 support on Monday. On top of that, there could be some window dressing as we stepped into the end of the month and quarter today. Finally, news that Manulife is seeking to raise SGD 569 million in the largest Singapore IPO in nearly a year may also helped sentiments.

Meanwhile, the STI hopped back into the consolidative range of 3300-3350 that we have seen for the past four weeks. So it would be premature to judge the strong performance today as the start of a recovery in Singapore shares.

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