The ups and downs of China markets

The waves of China equities were as choppy as those in the Gold Coast, Australia, but it is clear that Chinese retail investors are no surfers.

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Returning from a long weekend, domestic markets were engaged in a bloodbath in the morning session, triggering forced liquidation and loss-cutting all around, before institutional buying emerged to put a floor on the downside.

In fact, the buying on dips was so strong that the China A50 and the CSI 300 rebounded more than 3%. However, Chinese equities were still lower by about 10% since last week.

To make things worse, depending on your perspective, recent China data points towards a stabilisation in the economy.

The Flash PMI released today showed slight improvements for June but still remaining below the key 50.

Signs of stabilisation reduced the need for more government stimulus, which means the scope for more monetary easing has narrowed. Previous expectations of more rate cuts from the People’s Bank of China (PBOC) were dampened by the lack of policy action from the Chinese central bank over the last two weekends.

A-shares selling by Insiders also sped up recently. According to HSBC, insiders sold CNY 100 billion of shares in the first three weeks of June, following by CNY 145 billion in May. Subsequent magnitude of insider selling may be interpreted by individual traders and institutional investors as a negative sign. What this means is that we could see more pressure on Chinese equities if insider selling accelerates.

Meanwhile, the China regulator’s move to cool the stock market through tighter rules on margin trading would likely persist in the short term. But it may be premature or even erroneous to pronounce an end to the bull market. To be clear, the Chinese authorities are seeing a stable and healthy stock market as beneficial to the economy, therefore they are expected to support the stock market to an extent.

That said, more monetary easing should not be interpreted as Beijing’s intention to cushion A shares. Policy action is still pretty much influenced by the necessity of supporting the economy. Nonetheless, a stock market collapse is not something the Chinese authorities want to see. In my view, they will strive to engineer the stock market to transit into a slow and stable bull market.

Euro hit by ‘ECB trades’

EUR came under fresh pressure, clearing stops below the 1.13 to test below 1.1250, on the so-called ECB trade. Optimism over the Greece debt discussion points to increasing expectations that the market will buy into European shares and sell euros. Greek government said that the tone in the bailout talks have improved, following the emergency meeting, and the two sides are moving towards a deal.

Certainly, this is very positive and corroborates with creditors’ commentary. As mentioned in today’s morning note, Greek PM Tsipras still needs to get past the Greek parliament to green-light any deal. Meanwhile, the EUR/USD is still trading within a broader range of 1.10-1.15.

STI remains sideways

Greek optimism continues to keep Singapore stocks supported, with positive sentiments seen across Asia today. However, we will not be too quick to draw conclusions about a rebound in the Straits Times Index (STI). The Index remained within 3300-3350, with the topside is still capped below the key 200-day moving average of 3360.9.

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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