Asia leaves China and Japan behind

While we saw a bounce in most Asian equity markets, Chinese stocks continued to fall as state buying was nowhere in sight. This raised the question whether the rebound was just a respite.

Shanghai Exchange
Source: Bloomberg

The Shanghai Composite decimated the 3000 level, closing down 7.6%, at 2964.97. Likewise, the China A50 and CSI 300 tumbled -6.4% and -7.1% respectively.

The absence of government intervention meant there was no stop-safe in the freefall of the Chinese markets. Bloomberg reported that China has stopped intervention in the stock market this week as some officials are sceptical about the support measures.

The key argument for not continuing to cushion the stock market was the limited impact that domestic equities have on the Chinese economy.

We have previously mentioned that a huge chunk of Chinese household’s finances are kept in bank deposits and properties, and equity investment constitutes a small portion. Secondly, the costs of supporting the market is too high.

We have a glimpse of this view when the China Securities Regulatory Commission (CSRC) said that the China Securities Finance Corp (CSFC), the state agency designated to support the Chinese equities, would not increase its equity holding unless there is excessive volatility and systemic risk. However, I feel that the recent sharp selloff qualifies as excessive fluctuations.

This means that the government simply thinks that any contagion from the falling stocks is expected to be contained. Furthermore, the Chinese government is passing on the buck by allowing pension funds to invest up to 30% of their net assets in equities.

The lifespan for the renewed rout in Chinese stocks depends on how US equities perform in the coming sessions. The European equities are carrying on the baton for Asia’s bounce, with major indices recovering over 2% in early London hours. For the moment, the trend is still pointing south.

Japan had a wild trading day, swinging a 6% range, as volume was more than twice the 30-day average. The Nikkei 225 rebounded in the morning session, in tandem with most Asian indices, but pulled back sharply in the afternoon half, plunging below 18000 to a near seven-month low.

The index ended 4% lower today. The continued demand for JPY may have contributed to the weakness in the stock market, since a stronger yen was seen to be negative for Japanese firms’ overseas profits due to currency conversion. The JPY has appreciated as much as 4.4% in the past-three sessions, although it has given up some of the gains today.

Investors should proceed with extreme caution in the current situation. While there could be some genuine demand from traders who are hunting for value or bargains, the markets are not out of the woods yet. I see today’s rebound as more of a technical move.

Let’s look at Singapore for instance. The Straits Times Index nosedived through several support levels yesterday and it is approaching a strong barrier at 2800. This could convince contrarian investors that there is value in picking up stocks at this level. The reality is that we have not seen any obvious impetus for the rebound once again. This should make market participants nervous.

Of course, I won’t rule out a consolidation to ensue over the next few sessions, which could then suggest that we have likely seen the bottom of the rout. In the meantime, I would sit tight on my cash and wait for more confirmation. That said, if you still hold a bearish view, there is always the option of shorting the equity markets.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.