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Risk is back in the game

Market sentiment continues to improve on Wednesday, as investors’ appetite for risk appeared to have grown in the overnight session. 

Singapore's Skyline
Source: Bloomberg

European equities advanced over 1%, with the risk-on mood extending to the US markets. After returning from a long weekend, US stocks saw a strong rally, accompanied by sales in US treasuries.

Of course, the rebound in China shares certainly has a hand in the pickup in risk sentiment. If we recall, the Shanghai Composite jumped almost 3%, which saw the CSI 300 chalking up a 2.6% gain. State support may also be at play here, given that the China A50 rebounded 1.9% yesterday after tumbling 4.7% on Monday. It seemed there is now some clarity in the risk markets, after a nerve-wrecking start to the week.

In mainland China, there is some focus on the government’s plans to ramp up fiscal policy to support the economy. The Ministry of Finance (MOF) announced a plethora of initiatives on its website, including speeding up some major construction projects, removing fees and reducing taxes for companies.

Keeping in mind the aim to shift China to a consumption-based economy, the MOF is studying reform plans for resource tax and personal income tax, while seeking to promote consumption tax reforms. This is very positive for overall market sentiments.

Earlier on Monday, MSCI CEO Henry Fernandez said that the inclusion of A shares into its indices may happen sooner than expected. He believed the recent violent market fluctuations will not affect the decision to include Chinese shares in its MSCI indices.

However, the three issues (quota allocation process for QFII and RQFII, capital mobility restrictions, and beneficial ownership issues) highlighted by the MSCI during in June review have seen no notable changes in recent months. It is estimated that the inclusion of A shares would bring USD 400 billion from asset managers, pension funds and insurers into Chinese equity markets over time.

Japan and Australia are racking up some strong gains in early Asia, with the Nikkei 225 testing the 18,000 level while the ASX 200 is eyeing the 5200 mark. In Japan, Prime Minister Abe pledged to lower corporate tax in FY2016 by at least 3.3 percentage points, while reiterating that strengthening corporate governance remains at the top of the agenda. Clearly, this bolstered the outlook for Japanese companies. I am expecting markets across Asia to go into risk-on mode today. The Straits Times Index (STI) is likely to rally beyond 2900 today.

In the currency markets, the AUD extended gains into a third session, moving stronger above 0.70, on better sentiments. The Aussie was accompanied by NZD, which moved higher towards 0.64. Traders are paring their holdings of the Japanese yen as safe-haven demand receded. The USD/JPY advanced further in the 120 handle.

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