China rebound continues

Asia looks set to close out the week on a fairly bullish tone, with the Chinese markets following on from yesterday’s strong upside move.

Source: Bloomberg

In fact, the Shanghai Composite is seeing the best two-day gain since 2008, although the key difference between now and 2008 is that in 2008 a large percentage of the market wasn’t suspended. A number of traders are even using the word ‘market’ lightly as that implies traders can actually express a view – positive or negative. When you have a fear of legal ramifications of selling you generally stay out of trading futures, especially if you are running a fund and then face the prospect of finding alternative employment or worse: jail time. There is even market scuttlebutt of brokers not even accepting sell orders – how does one even book a profit?

China has become quite a simple beast though, in that if you limit as many paths for market players to sell stock as you can - while subsequently using the Securities Finance Corp to support the market through a quasi-QE initiative - you should get a higher stock market. Mission accomplished!

There has been of a lot of talk about whether we have seen the lows in the various Chinese markets and this could well be the case if the authorities can limit the sell orders in the market. Valuations have come back to somewhat more realistic levels in the Shanghai Composite (13.7x forward earnings) and ChiNext index (37x forward earnings), although both still remain at a premium to long-run average. The level of outstanding margin debt has also fallen nearly 40% since the June peak and this is supporting too.

It’s also interesting to see that we saw a massive $12.6 billion of inflows into Chinese equity funds from international money managers (data to the week to 8 June), so clearly this has been deployed into the market. The fact we saw the 200-day moving average defended yesterday with such vigour (CSI 300 and Shanghai Composite) is interesting and this now becomes the key line in the sand for traders.

Greece is also aiding sentiment and traders are expressing the view that ‘Greece is solved, get involved’, or words to that effect. The new proposals that have been announced in the early Asian session have seen a strong move higher in US futures and our opening European calls also look strong. This has also provided real backbone for the ASX 200 which is dangerously close to being positive for the week.

Still, it must be said that the proposals that have been presented from Alexis Tsipras are quite confusing and perhaps this is why EUR/USD seems hesitant to push through $1.1100. The Greek public voted against austerity last Sunday, yet what we have seen is a giant step closer towards the Creditors prior proposal which was subsequently rejected, ironically by Tsipras. There will be factions within the Greek parliament that simply won’t know what Tsipras is playing at, so when the Greek parliament vote on these measures today it is by no means a done deal.

It is by far the most likely proposal to be accepted by the Creditor nations, but will it be the carrot to allow what everyone knows is inevitable one way or another – a full restructuring of debt? A vote through the parliament does form a strong basis to take into the Sundays EU meeting and if we get a decision then we could be staring at a situation where Greece receive €53 billion and are fully funded until 2018. Problem solved!

Of course, either a failure to pass the new austerity measures through the parliament today or even a rejection from the Creditors on Sunday and next week will start on a negative footing. However, with China looking like it may sustain the rally, in turn supporting commodities, and if Greece does get funding from the European Stability Mechanism (ESM) then there is a real chance that the US quarterly earnings season will push the feel good factor up another gear.

Turning to US markets and with market consensus expecting 2Q EPS of $28.68 (-4.8% yoy) and $114 for the full-year (lowered by 9% since the start of the year) the bar is set (once again) so low that an earnings inspired rally seems a strong probability. Throw in a much more compelling level of negative to positive announcements (3:1 vs 5:1 in Q1) and improved quarterly growth and I feel there are upside risks for next week. Certainly financials will be interesting and I like the idea of being long Citigroup, adding to positions on a break of the June downtrend around $54.50 and exiting on a break through the July low of $52.77.

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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