China marches to its own beat

Risk appetite in Asian markets may wane a little if we were to take cues from the overnight markets.

Source: Bloomberg

Gains in European equities, while still rather strong, are not as impressive as that on Monday 22 June.

US markets eked out mild returns despite the record highs headlines. But of course, China will march to its own beat.

It is interesting how the Chinese state media was reportedly instructed to avoid excessive reporting on the massive corrections seen last week.

Several commentaries were trotted out to ‘soothe investor concerns’, which to some extent, may have worked, judging from yesterday’s session.

The Shanghai Composite was down almost 5% at one point on Tuesday, before making a remarkable comeback to close up 2.2%. There was also talks of institutional buying at the bottom.

The People’s Bank of China (PBOC) remains mum on cuts. Typically, there would be rumours and market chatter floating around about the state banks preparing for a policy move, however, there are currently no sign of this happening. Coupled with that, the CICC now believes that the easing cycle may be on pause.

This feeds into the idea that signs of stabilisation in the Chinese economy may reduce the need for more stimulus. Nonetheless, given that a stable bull market is preferred by the Chinese authorities, they are expected to step in if there is an excessive correction.

There may also be continual focus on margin financing, with retail investors particularly sensitive to any fresh restrictions on margin trading. We are also awaiting more developments on CSRC plans on margin trading risk management rules for local brokers, which followed recent measures to limit margin financing. Taken as a whole, this is a healthy development for the Chinese stock market as stronger risk management would protect the investors’ interests.

For Greece, while the mood for the negotiations has definitely turned positive and constructive, I think it may be premature to pin too much hopes on a ‘done deal’. Even if there is an agreement of sorts crafted from today’s meeting of the euro-area finance ministers, Greek PM Tsipras still has to receive approval from Greece’s parliament, and signs of dissent within the Syriza-dominated legislature have already emerged.

This implies we could still see some delays. For what it’s worth, most European leaders were optimistic that progress will be made on striking a deal. IMF chief, Christine Lagarde, said she is confident that Greece will be able to pay the EUR 1.5 billion payment on Tuesday, 30 June.

Interestingly, EUR/USD fell sharply alongside its one-month implied volatility. Perhaps the optimism on the Greek talks is bringing focus back on the Fed and the first rate lift-off, and with policy divergence back on the table, this may have prompted many to consider going back into the so-called ECB trade – short EUR/USD.

Meanwhile, we can expect a light calendar for Asia today. BOJ minutes for the Friday 19 June meeting could be of interest, while China consumer sentiment and leading economic index are unlikely to be market-moving.

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