Big players eye China stocks

Many analysts seem to be recycling the ‘bad news is good news’ theme, but the disappointing flash PMI reading is not the main reason why Chinese equities rallied today.

China flag
Source: Bloomberg

China Securities Journal reported that the Chinese mutual funds are seeing net buying due to lower redemptions amid the super bull run. Previously, the higher the stock market went, the greater the redemption pressure.

This outflow narrowed in April before switching to an inflow in May as participants remained invested in the mutual funds. Clearly, traders expect the increased liquidity to push stocks higher.

Most mutual funds think the odds of a reversal of the bull market to be miniscule, although they are wary of the impact of the elevated margin trading, perpetuated by brokerages. In addition, retail investors are shifting away from blue chips to trading small-to-medium cap shares as a result of policy measures to suppress excessive speculation.

This is evident from the outperformance of the Shenzhen shares, which comprise counters with smaller capitalisation, in comparison to Shanghai equities. The Shenzhen Composite closed at another record high, breaking past 2700 and ended 3.6% up.

The Shanghai Composite reclaimed the 4500 handle, advancing at a comparatively ‘modest’ 1.9%. CSI 300 Index is still targeting a break of the 4850 resistance after several attempts over the past month. The lower weighting of Shenzhen equities in the index explained why it ‘struggles’ to move higher.

Should the net buying from mutual funds sustain in the coming months, we could see the momentum carrying CSI 300 higher. Data out from China continues to show manufacturing activity remaining under pressure. Flash PMI for May underwhelmed consensus at 49.1 and stayed in contraction zone.

Continued pressure in the industrial sector does not bode well for economic growth and may make the 7% annual GDP target even harder to achieve. This builds the case for more stimulus. As it stands now, indicators point towards further slowdown in the China economy.

The Li Keqiang Index fell to a record low of 1.8 in March and usually leads growth. The Index is constructed using a weighted average of three economic indicators – bank lending, rail cargo volume and electricity production.

Euro rallies on improved EZ PMI

The euro rose across the board, though we only see good gains against the USD. Eurozone manufacturing PMI was higher than expected, which suggests improvement in the outlook for inflation and employment in the bloc, even as German PMIs missed estimates.

EUR/USD rallied to highs of 1.1173, flushing out intraday stops above 1.1150. However, the 20-day moving average at 1.1187 could cap further upside potential. The Greek situation remains a prime concern as the heavily-indebted country expects to default if no deal is reached by 5 June.

Some respite in STI

Trading volume in the Singapore stock market picked up on Thursday with around 2 billion units changing hands at a total value of SGD 2.13 billion. This probably helped the Straits Times Index (STI) to snap its losing streak.

The increase in interest was mostly driven by the over 380 million shares turnover in Global Logistic Properties, whose price climbed over 3%. However, as a whole, market breath remains weak with 224 decliners versus 197 gainers as of 5.02pm.

Meanwhile, concerns about the El Nino impact on agriculture have delivered a boost to Wilmar International, which gained 3.1%. The Met Office predicted a 70% chance of a moderate El Nino event towards the end of this year.

Looking ahead, ECB President Draghi is going to speak at a ECB forum while commentary out from the European leaders meeting in Riga will be closely watched. In the US calendar, we have jobless claims, manufacturing PMI, existing home sales and Philly Fed Index.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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