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Investors were perhaps spooked by the massive selloff in China and Hong Kong equities on Thursday, which prompted them to offload their local equity holdings.
The percentage of STI components whose share prices traded above the 50-day moving average fell to 43%, a two-month low.
Ironically, trading volume picked up today with Friday’s trading volume over 80% higher to its 30-day average volume.
The Index looks set to end the week in the red for the fourth time this month, meaning that the STI will have the first-monthly decline this year for May.
Bank counters were on the back-foot in recent sessions, retracing from a strong rally earlier, which was driven by expectations that the imminent Fed rate lift-off will deliver a boost to net interest margins. However, the delay in the FOMC move has seen the 3-month SIBOR falling nearly 20% since mid-April.
If we look at the momentum oscillators, the MACD chart showed a divergence pattern, suggesting that a downside momentum is increasing in the STI. The next key support level to watch will be the 200-day moving average at 3360 after the sharp fall through the 50-day and 100-day moving averages in just three sessions.
China stabilises after Thursday’s selloff
The huge selloff in China and Hong Kong stocks appears to have come to a choppy end today. A move by brokers to tighten margin financing and reports of the PBOC draining liquidity out from some banks using bond repurchase agreements caused the massive drop on Thursday and prompted the usual mongering of a correction.
The reality is that China equities have seen an incredible rally this year and profit taking activity tends to exaggerate any declines. The retail-driven nature of the upsurge also amplifies fluctuations in the stock markets when you compared them to other more established bourses. It would be an overreaction to say Thursday’s fall as the start of a bear market.
The 6.5% fall is the second biggest single-day decline this year. The largest was on 19 January 2015 (-7.7%) after news that the Chinese securities regulator banned several large brokers from opening new margin accounts. The Shanghai Composite resumed its bull-run thereafter. Of course, historical performance should never be taken as an indication of future movements.
Today, we did see some stability in China shares ahead of the weekend and next week’s tranche of 23 IPOs. The sharp pullback may provide the opportunity for investors to go back into the market given talks of high valuations. I won’t be surprised if the losses chalked up this week are erased in the coming week.
Key data in the coming week
A number of data and events taking place next week would likely inject another round of volatility. The European Central Bank (ECB) and Reserve Bank of Australia (RBA) will have their policy meeting on Tuesday 2 and Wednesday 3 June respectively. US nonfarm payroll and OPEC meeting will be slated for Friday, along with Greece’s €300 million loan repayment to IMF.