China shares lead Asia decline

China started the week on a bearish note, as a triple whammy of tighter margin financing, lack of fresh the People’s Bank of China (PBoC) measures over the weekend, and scheduled IPOs this week squeezed out enthusiasm for domestic equities.

China Shanghai
Source: Bloomberg

Even the usual alternate buying into blue chips or smaller-cap stocks was absent today. The ChiNext Index fell over 4%, while the China A50 tumbled 2.7%, accompanied by a 2.1% fall in CSI 300.

There was an estimate that the 24 IPOs slated for this Friday will lock up around CNY 6.7 trillion (USD 1.1 trillion) of funds as recent batches of IPOs have typically seen an over-subscription of 200 to 300 times.

 Furthermore, CNY 161.2 billion (USD 26 billion) worth of municipal debt sales is slated for this week, while CNY 670 billion (USD 108 billion) from the PBoC’s Medium-Term Lending Facility will be due. A fear that the huge demand on liquidity this week has probably exacerbated the decline in China markets today.

In addition, a move by the China Securities Regulatory Commission (CSRC) last Friday will limit the size of margin financing and disqualify smaller investors from taking on margin debt.

Individual traders need to have a minimum daily balance of CNY 500,000 (USD 80,000) of securities assets in the last 20-trading days to take on margin loans. CSRC also set the size of margin balance for each broker to not exceed four times its net capital.

The new rules are meant to dampen market volatility, lending credence to the view that Beijing wants to see a stable and healthy bull market. The cap on brokers’ margin financing is not a draconian measure since the rule has been marinated in local media for a while.

What’s more, the net capital of Chinese brokerages stood at CNY 773 billion as of Q1, according to Barrons, which put the limit on margin finance at CNY 3.1 trillion. This is still well above the CNY 2.2 trillion in outstanding margin loans as of last week.

The decline in Chinese stocks also dragged the Hang Seng Index (HSI) lower. H-shares tumbled 2.6%, which saw the HSI fall 1.5%. Around 20% of the Index is comprised of H shares.

Singapore shares sold off

Mirroring broader risk-off sentiments in the region, the Straits Times Index (STI) fell around 1%, touching as low as 3309.49 today, led by a broad-based decline. Zooming out further, the STI was confined to the 3300-3350 band seen since the start of June, with the 200-day moving average at 3361.41, still posing as a strong resistance level.

Meanwhile, MACD indicator continued to show a bearish bias, with the MACD line remaining below the signal line as well as the zero line. We could see further weakness towards the 3300 level and failure to hold this handle will result in stronger downward momentum. Banking counters fell over 1% today, ahead of FOMC meeting this Wednesday.

The drop in the 3-month SIBOR rate to a fresh three-month low may have also contributed to the sell-off in bank shares. Further declines in the SIBOR may lead to a narrower net interest margin of banks in the months ahead. Clearly, this will be negative for banks’ share prices.

Noble rebounded 4.4% today and was the most active STI constituent. Market sentiments about the company seemed to be encouraged by their second share buyback, which pointed towards the commodity trader’s seriousness in allaying investors’ concerns.

However, the reality is that Noble continues to face pressure from several fronts, including a falling profit margin, a slowdown in commodity trading as well as issues relating to corporate governance and transparency.

I feel that piecemeal measures such as the share buybacks may not be sufficient to arrest the downward spiral as long as the background does not improve substantially. In short, we may see a dead cat bounce in Noble share prices.

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