Bears_rage_in_China

Chinese bears are relentless in their attack on the domestic stock markets. Government measures, both covert and overt, were unable to hold them back.

bg_China_databoard_SX00192_9
Source: Bloomberg

The Shanghai Composite (SSEC) posted another week of losses, and registered the deepest three-week fall in 22 years. The SSEC plunged 28.7% in the last three weeks since 12 June 2015. Nearly 1500 points were lost from the index. A total of USD 2.8 trillion was wiped clean from the China’s market capitalisation as of yesterday. Given another round of massive losses on the Chinese markets today, we should see a larger contraction in the market capitalisation.

                                           

Besides a slew of official initiatives, including rate cuts and loosening of margin trading rules, the Chinese government has been buying into A-Share this week, in a bid to stabilise the domestic markets. According to Chinese media (National Business Daily), China’s four large onshore A-share ETFs saw an inflow of $6.4 billion in the last four trading days, where Chinese sovereign fund Huijin was a significant buyer. Local media also reported that the Chinese government is buying the big four banks as well as two large state oil companies, PetroChina and Sinopec on Thursday. This could explained the smaller loss on the SSEC given that these firms are heavy-weight components.

 

Steps to shore up the equity markets appeared to have done little to stem the bearish tide, which may be fast turning into a tsunami. Beijing seems to think that the reason why their measures are not working was because of market manipulation. The CSRC is going after short-sellers suspected of manipulating the stock futures. Reuters reported that the China Financial Futures Exchange (CFFEX) has suspended 19 large accounts from short-selling for one month.

At the heart of the recent sell-off is deleveraging. Since much of the China bull run was driven by an incredible surge in margin trading, the unwinding of margin loans saw the unravelling of the bull market. The sharp pullback in the last three weeks further aggravate the deleveraging effect, as more margin calls are issued as traders’ stock holding declined in value. This is why Beijing eased margin rules late Wednesday, allowing brokers to ‘reasonably’ rollover margin debts. But Chinese brokers may still be looking at reducing their risk exposure by liquidating more margin loans.

 

Does this mean the government measures did not work? I feel that it is premature to dismiss the government initiatives. Policies take time to work their way through the system before sentiments can be more permanently altered. For now, the mood is verging on panic. It is extremely hard to calm a bear who is in a rage – not impossible, but tough.

 

Next week may prove equally volatile

As we end this week on a jittery mood, the coming week is shaping up to be one riddled with event risks. Investors are understandably nervous before the Sunday’s referendum, since it may seems that much is at stake. So far, polls suggest the outcome will be too close to call. Both ‘yes’ and ‘no’ results bear considerable risks for the global markets, although it does seems that the ‘no’ outcome may be a lot worse. This is because the odds of a Grexit scenario are significantly higher for a ‘no’ compared to a ‘yes’. Regardless of the result, traders should strapped in for a potentially volatile Monday. We are seeing sizable gapping risks next week.

 

Added to a tumultuous Monday, next week will bring a chockfull of Fed-speak, with Friday’s interview with Fed Chair Yellen the most important one to monitor. Minutes to the 16-17 June FOMC meeting will also be released on Wednesday, although the Greek crisis will likely overshadow the Fed. The Q2 earnings cycle will have a ‘soft launch’ next week, with Alcoa and PepsiCo to release their finances first, before beginning in earnest in the following week.

 

In China, macro data on the tap may contribute to the global market tone too. We have June inflation data due next Thursday 9 July while credit and financing readings may also be released. There are some fears that China’s deflation risks could have aggravated volatile trading in Chinese equities, so inflation reading will be keenly watched.

The Shanghai Composite (SSEC) posted another week of losses, and registered the deepest three-week fall in 22 years. The SSEC plunged 28.7% in the last three weeks since 12 June 2015. Nearly 1500 points were lost from the index. A total of USD 2.8 trillion was wiped clean from the China’s market capitalisation as of yesterday. Given another round of massive losses on the Chinese markets today, we should see a larger contraction in the market capitalisation.

                                           

Besides a slew of official initiatives, including rate cuts and loosening of margin trading rules, the Chinese government has been buying into A-Share this week, in a bid to stabilise the domestic markets. According to Chinese media (National Business Daily), China’s four large onshore A-share ETFs saw an inflow of $6.4 billion in the last four trading days, where Chinese sovereign fund Huijin was a significant buyer. Local media also reported that the Chinese government is buying the big four banks as well as two large state oil companies, PetroChina and Sinopec on Thursday. This could explained the smaller loss on the SSEC given that these firms are heavy-weight components.

 

Steps to shore up the equity markets appeared to have done little to stem the bearish tide, which may be fast turning into a tsunami. Beijing seems to think that the reason why their measures are not working was because of market manipulation. The CSRC is going after short-sellers suspected of manipulating the stock futures. Reuters reported that the China Financial Futures Exchange (CFFEX) has suspended 19 large accounts from short-selling for one month.

At the heart of the recent sell-off is deleveraging. Since much of the China bull run was driven by an incredible surge in margin trading, the unwinding of margin loans saw the unravelling of the bull market. The sharp pullback in the last three weeks further aggravate the deleveraging effect, as more margin calls are issued as traders’ stock holding declined in value. This is why Beijing eased margin rules late Wednesday, allowing brokers to ‘reasonably’ rollover margin debts. But Chinese brokers may still be looking at reducing their risk exposure by liquidating more margin loans.

 

Does this mean the government measures did not work? I feel that it is premature to dismiss the government initiatives. Policies take time to work their way through the system before sentiments can be more permanently altered. For now, the mood is verging on panic. It is extremely hard to calm a bear who is in a rage – not impossible, but tough.

 

Next week may prove equally volatile

As we end this week on a jittery mood, the coming week is shaping up to be one riddled with event risks. Investors are understandably nervous before the Sunday’s referendum, since it may seems that much is at stake. So far, polls suggest the outcome will be too close to call. Both ‘yes’ and ‘no’ results bear considerable risks for the global markets, although it does seems that the ‘no’ outcome may be a lot worse. This is because the odds of a Grexit scenario are significantly higher for a ‘no’ compared to a ‘yes’. Regardless of the result, traders should strapped in for a potentially volatile Monday. We are seeing sizable gapping risks next week.

 

Added to a tumultuous Monday, next week will bring a chockfull of Fed-speak, with Friday’s interview with Fed Chair Yellen the most important one to monitor. Minutes to the 16-17 June FOMC meeting will also be released on Wednesday, although the Greek crisis will likely overshadow the Fed. The Q2 earnings cycle will have a ‘soft launch’ next week, with Alcoa and PepsiCo to release their finances first, before beginning in earnest in the following week.

 

In China, macro data on the tap may contribute to the global market tone too. We have June inflation data due next Thursday 9 July while credit and financing readings may also be released. There are some fears that China’s deflation risks could have aggravated volatile trading in Chinese equities, so inflation reading will be keenly watched.

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Denne informasjonen er ikke utarbeidet i samsvar med regelverket for investeringsanalyser, så derfor er denne informasjonen ansett å være markedsføringsmateriale. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder. Se fullstendig disclaimer og kvartalsvis oppsummering.

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.