The end of the quarter

There were further signs of volatility as the US market bounced around. With no macro data of merit, US and European investors watched the developing political escalations in Hong Kong.

Hong Kong
Source: Bloomberg

The region’s second largest index will again be the focal point for Asian markets, as Hong Kong sees its largest civil unrest since the 60s. The pro-democracy demonstrators have continued to clog up the main business district in Hong Kong and look to be hunkering down for the long haul. With Chinese National Day (a public holiday) tomorrow, the likelihood of the crowds increasing is mounting.

The effect of the sit-in will have a two-speed reaction from trade – firstly, the initial delay to normal operations will disrupt fund follows and, secondly, the political volatility will bring an investment cloud to the normally sedate finance hub. Following the sit-in, falls in monthly and quarterly data will probably see trade below par, which will add to the worry. However, considering it will fall over two separate months, the data may not be as poor as if it had been published in a single month.

Interestingly, the Hong Kong dollar has remained rather resilient to the events and the minimal movements in the currency suggest that business as usual is actually the order of the day. Most Hong Kong offices have relocated to secondary sites and the ‘political noise’ will move on quickly enough without huge disruptions.

On the other hand, the reaction in the Hang Seng suggests otherwise. The island is a major trade hub for materials and service in and out of mainland China, and a considerable amount of shares listed on the Hang Seng are exposed to trade-related industries. The disruption could impact the bottom line, explaining the reaction in trade yesterday and today.

Ahead of the Asian open

With today being the end of the month and the quarter, the region is likely to see sporadic and random trade dynamics on little-to-no news.

The ASX is down 2.42% for the quarter, making this the first negative quarter since Q2 2013. For the month, it’s a little more concerning – the ASX is off 6.42% and the momentum breakdown looks like carrying through to October. This means Q4 will start on the back foot and will have to work very hard to finish the year in the green on current trends.

With the figures above in mind, trade today is likely to be more to the downside rather than up as hedge funds close their books on the quarter. The three days after the closing of a quarter are some of the quietest trading days in the year as managers calculate the quarterly numbers and reassess strategies for Q4. This may see a bounce in trade on the lower volumes through the market.

We’re currently calling the ASX 200 down four points to 5258 – further signs that the ASX is now deliberating whether this slide is overdone. Yesterday’s trade in the banks was textbook volatility: falling well over 1% in the first hour before rallying 0.8% in the second hour, and then shedding it all again in the final hour of trade. There are clear signs that the bulls’ resistance is struggling to stem the tide or the sliding AUD. With the appeal of rising bond yields increasing, all four banks are now either touching or have corrected since their respective highs.

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