Caution reigns in Asia

Market sentiments in Asia are decidedly on the cautious side. This is understandable as we head into the release of the FOMC minutes, which ideally should provide greater clarity on the timing of the first hike. 

Bank of Japan
Source: Bloomberg

While there are talks on the development of a ‘death star’ technical phenomenon in the Chinese and Hong Kong stocks, it appears that the 200-day moving average is an important level for the Chinese authorities.

We have seen the Shanghai Composite (SHCOMP) testing the key support level three times since support measures were implemented in early July. In fact, the index dropped below the 200DMA earlier before finding strength in the afternoon half. SHCOMP traded a wide 7% range today, jumping up 60 points in the last half an hour of trading to close higher.

Did the plunge protection team bailout the stocks again? Probably. This should not come as a surprise, given the government’s commitment to stabilise Chinese equities. Barrons noted that China’s Shipbuilding Industry was limit down yesterday as well as this morning, but managed to recover in dramatic fashion  closing 0.8% higher.

It is worthwhile to note that trading volume in Shanghai was 5% lower than the 30-day average, while margin debt fell for the first time in eight days on Tuesday. The declining trading volume may exaggerate price action due to tighter liquidity in the markets. We might see some large fluctuations in the coming session, but once again, investors should take a longer-term view on Chinese equities.

Although concerns over China’s slowdown are justifiable, much of the slowing momentum was a by-product of the economic restructuring drive since 2013. Put differently, the slowdown is transitory as China moves to rebalance the economy.

China is moving away from the past over-dependence on SOE investments and exports, towards creating sustainable growth impulses based on consumption-led drivers. Clearly, Beijing is also concerned about too rapid a slowdown, and is adjusting policies as it goes along to engineer a smooth landing.

The complexity of policy-making, while confronting multiple challenges and goals, sometimes leads to errors in implementing measures when looking at the rear-view mirror. In any case, perfect foresight is as rare as 20/20 hindsight is common.

Another argument for a cautious optimistic view on Chinese stocks stems from the fact that China’s GDP growth is still considerably higher than developed economies. Therefore, prospects of an improvement in corporate profits are still valid.

Meanwhile, some selling of dollars are giving other major currencies support, as some FOMC positioning goes into play. However, gains were fairly modest. The USD/JPY maintained at low-124, with 125 being the major barrier.

Some called this level the Kuroda line, after the BOJ governor said he does not see the yen weakening beyond this level after adjusting for inflation and trade. The OPEC estimated that the JPY is undervalued by 18% against the greenback.

For the moment, there is little catalyst for the yen to move in either direction as the market seems very comfortable at where it is. This could change if further weakness in yuan prompts the BOJ to unleash more easing measures. In this scenario, I reckon the Kuroda line would likely give way to market force.

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