Risk playing musical chairs

Just when you thought risk sentiment is on the mend, it unceremoniously crumbles in the US markets. This is going to deal a blow to Asia today. The risk-on mode is likely to give way to yet another cautious trading session or worse.

Standard & Poor's
Source: Bloomberg

The S&P 500 closed 1.4% lower in the overnight session after a 2.5% gain on Tuesday following a long weekend break. It looks like US equities are in a consolidation phase rather than a recovery, as the S&P 500 is currently stabilising within a broad 1870-2000 range.

There are talks that the recent rebounds are more short covering from funds than a genuine interest in taking a long view. My colleague Chris Weston noted that asset managers and insurers have built up sizable short positions on S&P futures ahead of this week. The unwinding would therefore have seismic effect on the cash markets.

Yesterday, I observed that hedge funds were covering their shorts in the Japanese market, which resulted in a massive 7.7% surge in the Nikkei 225. Short orders accounted for a near record 41.2% of trades on Tuesday, so it is not far-fetch to expect the same hedging interests in the US.

On a related note, the futures markets in China is being throttled by the authorities as they are viewed as a source of volatility. We have seen futures volume sinking to record lows. The CSI 300 and CSI 500 futures plummeted 99% since their peaks in June.

A string of measures from higher margin requirements to tighter position limits has tightened liquidity in the Chinese futures markets. The range of new restrictions would undermine the government’s efforts to attract greater participation from institutional investors.

Meanwhile, the pullback in US stocks may have some negative impact on Chinese equities, affecting the recent stability seen in the mainland shares. Already, analysts are expecting the Shenzhen-Hong Kong trading link to be delayed to next year.

Foreign investors have used the Shanghai-Hong Kong Connect to sell a net USD 4.8 billion worth of A shares since early July. The government would be wary of the same net portfolio outflows in the Shenzhen link when it is operational.

Bloomberg reported that Chinese Premier Li Keqiang sought to soothe global concerns about China’s slowing economy and yuan devaluation, saying that the country wants to avoid a currency war. He reassured that despite significant headwinds facing the Chinese economy, it is still growing in a reasonable range.

In Asia, Japan and Australia already started on the backfoot, dropping around 3% and 2% in early trade. China A50 futures fell 1.8%, suggesting that we could see mainland shares struggle today. Nonetheless, the Chinese rescue fund might intervene if the downward pressure intensifies.

The Straits Times Index (STI) would come under pressure if Chinese stocks gave way. The index was able to maintain and close above 2900 yesterday, therefore this is the level to watch.

Commodities under siege

Crude and gold prices saw renewed downward pressure. WTI fell 3.9% to close below $45, lowest in a week, as US supplies are anticipated to rise, which would worsen the oversupply problem. The Energy Information Administration cut its 2016 demand forecast. With OPEC still producing oil at record levels, it is difficult to see the supply glut easing anytime soon.

Separately, India looks set to reduce its gold imports as part of the broader efforts to trim its trade deficit by tapping on a plan to monetise domestic gold supplies. This development is bearish for gold as India is one of the world’s largest physical buyer of the precious metal.

*For more timely quips, you may wish to follow me on twitter at https://twitter.com/BernardAw_IG


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.