China looks up

Asia is seeing better risk appetite in the afternoon after having a cagey morning session. This was largely due to a strong recovery in the Chinese markets. A solid open in early European trade also helped sentiments.

Chinese Data and Charts
Source: Bloomberg

Large stocks in China received a bid tone, compared to the selling pressure yesterday. The China A50 rallied 1.9%. Smaller caps are still better bid, with the ChiNext Index surging 5.6%, which boosted the Shenzhen Composite to almost 4% gain.

The Shanghai Composite was not too shabby, notching up 2.9%. Likewise, the H shares benefited from the rebound in the mainland markets, with the Hang Seng China Enterprise Index climbing 4.1% andthe benchmark Hang Seng Index 3.3% higher.

There was no clear trigger for the rebound, although there were several developments that could have supported Chinese stocks. Firstly, news that China plans for some state-owned enterprises (SOE) to seek share listing and privatisation, as part of its SOE reform plan, might have prompted demand in SOE shares.

Progress on the SOE reform plan is critical, as the inefficiency of state-run companies have been a dampener on growth. The growth in “value-add” of industry state-owned firms has been slowing since 2010, and fell to zero in July, the lowest since the global financial crisis in 2008. JP Morgan noted that there are over 150,000 SOEs in China, accounting for almost 80% of the CSI 300 Index, and 17% of urban jobs. 

Secondly, plans to introduce circuit breakers in the CSI 300 index to tame wild swings may have found favour with investors who desire more market stability.

However, Chinese trade numbers for August were mixed, although the much deeper than expected drop in imports reinforced the narrative of a slowing China. This will continue to have an impact on demand for raw materials. In USD terms, exports and imports contracted -5.5% and -13.8% respectively, while the market was looking for -6.6% and -7.9%. As a result of the deeper shrinkage in imports, trade surplus widened to USD 60.24 billion from USD 43.03 billion previously.

In the currency markets, Aussie saw solid demand, although the AUD/USD was unable to regain the 0.70 level. NZD also headed higher alongside AUD. However, with RBNZ meeting looming on Thursday, I feel further upside will be limited, especially when the consensus is for a rate cut. GBP climbed towards 1.54, helped by a jump in GBP/JPY after news that Japanese insurer group MS&AD Insurance Group agreed to buy Lloyd’s of London insurer Amlin Plc for GBP 3.47 billion. As such, the Japanese yen weakened. USD/JPY is trading at the key 120 level in late Asia.

Singapore

The Straits Times Index (STI) saw selling pressure immediately after the opening bell, as Chinese markets were somewhat shaky in the morning session. The Index sank below the 2850, but managed to held firm on approach of the 2800 level. With more stability and demand in Chinese equities during the afternoon, earlier weak sentiments reversed.

The STI rebounded above 2850, led by recovery in financials. All three banks saw a sharp rally in the afternoon, from 2.30pm onwards, shedding early losses. The rebound was across the board, with most sectors showing good gains.

Unsurprisingly, Jardine Matheson Holdings and Jardine Strategic Holdings, two of the STI constituents that will be dropped from the benchmark index come 21 September, did not move higher in tandem. Wilmar looks set to extend its losing streak to the sixth straight day.

The share price of the agribusiness company was consolidating in the first half of 2015 before slipping into a downtrend in August. From a peak of SGD 3.42 on 26 May 2015, the counter tumbled 25% to sub-SGD2.60 today amid gloomy commodity outlook.

Bloomberg reported on 25 August that Religare has issued a new sell on Wilmar, citing poor returns from capital expenditure. Specifically, the company’s core refining business was weighed by severe overcapacity as well as volatile trading gains.

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