China’s free-fall slows

Given the market’s reaction in China after the weekend initiatives, I am somewhat vindicated for my cautious view. However, this does not make me happy at all, and raises the question of ‘what does China need to do to stem the bleeding?’

China flag
Source: Bloomberg

Depending on what you look at, the anticipated boost to blue-chip counters was not as even as expected, which perhaps in hindsight should not come as a surprise in the infamous Chinese volatility.

The Shanghai Composite fluctuated within a 400-450-bp range, touching as low as -0.9%, before closing at 2.4%.

We’ve seen financials and property counters leading a recovery in A-shares in late Asia. However, if you look at China A50, the rebound was quite strong.

Given that much of the firepower is concentrated on larger-cap stocks, investors are naturally more confident with holding them.

The same cannot be said about the small-caps. At one point, the ChiNext fell over 7%, before some good bids filter through towards the end of Monday’s session. The Index closed down 4.3%.

Some of the resistance capping a rally in Chinese equities probably originated from net foreign selling through the stock connect. As of 2.00pm SGT, net selling of Shanghai stocks through the trading link reached CNY 11 billion, (USD1.8 billion).

The broader picture is that the market, dominated by retail investors, remains sceptical about those measures. Influencing a shift in market sentiment through policy action is a slower moving ship, but I don’t think it will stop Beijing or the financial sector from trying stronger initiatives. Still, it remains to be seen if the latest string of measures may work.

I feel that we could see a two-tier equity market in the near term, where the blue chips will benefit from the various measures, while the small caps will suffer as traders become disillusioned over their sky-high valuations.

The P/E ratio of Letong Chemical, a company producing printer inks and listed on the Shenzhen Stock Exchange, nose-dived to around 6200-6300 as of 6 July 2015, compared to 9560 a week ago, on 30 June 2015. It is likely that the authorities will support larger caps, rather than trying to ‘rescue’ the penny stocks.

Central Huijing Investment, a state-owned investment firm, said on Sunday it has recently bought ETFs that track major stock indices and will continue to do so, confirming rumours that the government is stepping in to shore up the stock market.

Meanwhile, the latest Chinese measures to arrest a stock collapse created collateral damages. Hong Kong stocks were dragged down by a huge selloff in China H-Shares, with the Hang Seng Index testing below 25,000 at one point. The mainland brokerages’ valiant endeavour to support the Chinese stock markets affected investors’ views of their profitability.

The H-share prices of Citic Securities plunged over 8%, as of 3.47pm SGT. Moreover, global jitters resulting from the Greek ‘no’ vote could have also spread to sentiments in Hong Kong. In fact, most of the Asian stock markets were in a sea of red, with the  Nikkei and the ASX ending 2.1% and 1.1% lower respectively.

Markets still complacent about Greece?

The reaction to Greece’s ‘no’ answer in global markets appeared less aggressive than expected. Yes, there are some investors flocking to safe-haven assets, such as treasuries, JPY, and USD, but by and large, the fear has not turned into panic. The Euro Stoxx 50 Index fell almost 11% in a two-month period, since mid-April. In contrast, the Index tumbled 25% within July-September 2011, over concerns that Greece will default on its loans.

EUR/USD was also quite resilient, supported above 1.10. The market seemed to like the fact that Greek Finance Minister Varoufakis has resigned from his position. What was surprising is the drop in the one-week implied volatility, from 15.5 last Friday, to 14.1 today. Perhaps investors are more confident of a deal in the days ahead.

Traders would have their heads wrapped around tonight’s ECB discussion on the ELA aid for Greek banks. A suspension of emergency liquidity will effectively mean an end for the Greek banking system, so this is quite unlikely. What is important will be ECB commentary going forward, since it is quite clear that it cannot support the Greek banks indefinitely.

Prospects for a Grexit scenario certainly have increased significantly after the referendum. Credit Suisse priced in a 75% likelihood of that happening. Opinion polls in Greece leans heavily towards staying in the EMU, so how Greece reconcile the ‘no’-sayers and EMU membership will be critical. 

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.

Find articles by analysts

Een artikel zoeken

Form has failed to submit. Please contact IG directly.

  • Ik wens per e-mail informatie van IG Group bedrijven te ontvangen over handelsideeën en IG's producten en diensten.

Voor meer informatie over hoe wij uw gegevens mogelijk kunnen gebruiken, bekijkt u ons Privacy- en toegangsbeleid en onze privacy website.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.