A-H premium widens

Divergence in Chinese and Hong Kong equities resurfaced on Tuesday as reflected in the widening AH premium.

China, Shanghai
Source: Bloomberg

Shanghai Composite (SHCOMP) closed up at 1.6%, just a whisker above 4400, while Hang Seng Index (HSI) fell 1.1%, ending below 27,500, dragged by the selloff in H-shares and financial counters.

The AH premium index rose 1.8% to around 132, indicating that A-shares is trading at a 32% premium to H-shares.

Turnover in Hong Kong shares has been slipping in the past month, since reaching a high of 5.2 billion units on 9 April 2015. In the same period, the HSI dropped 2.2%. Should the moderation in trading volume persist, we would see further declines in the Index.

The remainder of the Asian markets showed little trading direction ahead of a raft of regional data to be released on Wednesday. Top of the line will be China’s industrial production, urban fixed assets and retail sales while credit and liquidity data may also be announced.

Given the sensitivity of the domestic equity markets to economic data, in particular weaker numbers, a lack of improvement in the readings will fan expectations of more stimulus measures. Wednesday will be an exciting day for traders.

Hopes of Shenzhen-Hong Kong link intensifies

The Shenzhen-Hong Kong stock connect, similar to that of the current Shanghai-Hong Kong link, is anticipated to provide a fresh fillip to the mainland and Hong Kong stock market. Since SH-HK link started, global investors had directed CNY 135 billion (USD 21.7 billion) to Chinese equities, we could see a similar appetite in Shenzhen.

Hopes of the second stock connect were partially responsible for the Shenzhen Composite (SZCOMP) outperformance compared to its Shanghai brethren. On a month-to-date basis, SZCOMP rallied 5.8% while SHCOMP was slightly lower at -0.9%.

The State Council reportedly approved the stock-trading link, which may be established as early as the second half of this year. HKEx Chairman Chow Chung Kong commented that the start date may be announced by end of June. We may see more information when HKEx announced its Q1 earnings tomorrow (13 May 2015).

US to see greater pressure

We are calling for US markets to face deeper pressure ahead of the US open with limited data on the docket. The sharp selloff seen in early European hours may be extended to the US session.

A surprise upside in UK industrial production lifted the sterling, but failed to inspire the FTSE as a meeting of EU ministers is underway. The market will be pinned on any commentary out from the meeting, which is likely to touch on the two major issues at the moment – Greece and the UK membership in EU.

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