Trader thoughts - the long and short of it

One clear theme that has garnered focus in the past 24 hours has been the trading behaviour of the Chinese retail trader on the outcome of the weekend's fifth National Financial Work Conference.

Market data
Source: Bloomberg

By now, this is not a new story and perhaps this could have been covered in greater depth yesterday, but the message from the conference has been widely discussed, with calls to impact over the medium-term for stronger financial regulation. The creation of a new regulatory oversight body named ‘The Committee of Financial Stability and Development of the State Council’ has been put in place as a key priority, with the view to focus on systematic risk, better serve the real economy and deepen financial reform. This was all held behind closed doors, but the message has resonated with the trading public.

Increased regulatory oversight and possible greater efficiencies in managing the risks in one of, if not, the most important business sectors in China should be taken well by overseas institutional investors, who are looking more favourably at Chinese equity and fixed income over a longer period.  These regulatory measures are a medium- to longer-term proposition anyhow. However, as a trade the Chinese retail trader tend to find their inspiration from the message they hear from the government, central bank and other regulatory bodies. The message they heard here was sell stocks, sell crypto-currencies and perhaps even take a less positive stance on property, although this asset class is obviously not traded on an exchange and subject to daily swings like equities are. The wash-up has been some sizeable moves in small caps and high growth, innovative companies, with large caps under pressure too.

Offshore indices in Hong Kong saw good selling too, although the medium-term trend remains higher and the gains in the Hang Seng should be seen more as a macro play on the low inflationary dynamics in the US, and the more positive feel towards emerging markets than what Chinese retail traders are doing.

However, as we often see, its keep calm and rotate asset classes in China and in this case we have seen money rotate into commodities, with iron ore futures romping ahead. The spot fixing was 1.6% higher and we can probably throw in tailwinds from record steel output and solid economic data in the shape of industrial production and Q2 GDP. However, on the whole, this is a speculative driven market and perhaps this is another reason why we haven’t seen outrageous moves in the UK listed miners. Still, going long in energy and materials is where the flows have been headed in recent times and these moves we have seen in bulks and base metals won’t hurt one bit.  

Interestingly, the AUD has not seen any love from the support for commodities, with some of the heat coming out AUD/USD after the recent rally and price currently oscillating around the 78 handle. This seems a function of profit taking, although the moves in China could be seen a reason to bank some profits, although that is a stretch. Tactically, it could also be a good time to reassess AUD longs, because while we have RBA minutes today and June employment data on Thursday, we need to consider that on Friday we have two RBA members speaking.

If the AUD is genuinely starting to make them hot under the collar, with a view the AUD strength could pose problems for their inflation outlook, then this is the forum to start talking down the move. Friday afternoon and the period between 12.00pm and 2.30pm AEST subsequently pose a strong event risk for the AUD, so factor that into risk management.

While the AUD gets a strong focus this week, so too must the EUR, with the highlight here being Thursdays ECB meeting. EUR/USD is eyeing a break of $1.1500 and the ceiling that seems to be in play, driven largely by a narrowing of bond yield spread differentials between the US and German markets. After Mario Draghi’s recent speech at Sintra, which got a lot of traders excited, many now expect an announcement at the September meeting. Many now expect that it will scale back the pace of bond purchases in the new year, does it really serve anyone if the ECB suddenly change the script and reverting to a more dovish stance if they are going to make a big announcement in the months ahead? I suspect not and consistency is key, and the message we hear in Sintra should be reinforced. In theory, this should support EUR, but let’s not forget the USD is trading at extremes in terms of negative positioning and sentiment.

In terms of equity moves, all three main US equity markets have closed completely unchanged and Netflix’s strong moves in the after-market, despite a nice set of numbers, notably Q2 total net streaming adds at 5.2 million relative to analyst estimates for 3.27 million should do little to push futures materially higher. SPI futures have followed suit with little change in the night session, with our call for the ASX 200 open sitting a touch lower at 5749. Production reports in the mining space start to ramp up today so that may take some focus, although they usually don’t promote too great a reaction and there is more of a chance for analysts to assess how close to the company they are. Energy may find some profit taking given crude has dropped 0.5% on the session.

The ASX 200 still feels like it needs new news, as this period of range trading where the market can’t close below 5675 or above 5800 looks set to go on for some time further. The market internals mirror this and are about as neutral as you will see. 

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