China shows stability

The resumption of Chinese markets after a four-day long weekend did not spell another rout in the Asian equity markets. It was actually quite puzzling.

Source: Bloomberg

Investors bought smaller cap stocks while avoiding larger counters. The China A50 fell 4.7%, almost breaking below 9500. CSI 300 was 3.4% lower. On the other hand, the ChiNext index advanced 2.1% which helped the Shenzhen Composite eked out a 0.2% gain. Taken together, it reflected the continued uncertainty of the market in ascertaining the direction of the trade.

It is clear that the assurances given by senior Chinese officials over the weekend had some effects on market participants. PBOC governor Zhou Xiaochuan said that the renminbi and the stock markets should see stabilisation in the coming weeks, adding that state intervention had prevented systemic risk and arrested a free-fall.

Moreover, the government is stepping up on measures to curb excessive market volatility. The China Financial Futures Exchange is increasing margin requirements and settlement fees for stock-index futures. There are also discussions on imposing circuit breakers in the event of ‘abnormal’ swings, according to Xinhua.

Nonetheless, the lack of demand in blue chips suggested that state support was not evident in today’s session. However, this is not to say that the government may not step in in the future. It just means that they are going to be more tactical about their interventions from henceforth.

Meanwhile, the reality is that market participants are still working out how this week is going to play out. The varying performance of Asian indices today reflected that uncertainty. Most regional bourses were seen heading lower in late Asia. Additionally, investors are not keen on taking on risks, with the US markets returning only on Tuesday after closing for Labour Day today.

What was interesting, however, was the relatively negative sentiments in Asia have not dented demand in the European and US futures. I feel that global investors believe there is going to be stability in the Chinese markets in the coming sessions, which explained their cautious optimism that the global stock rout is more or less in the rear-view mirror. US futures pushed higher, with S&P 500 futures adding as much as 20 points during Asian hours.

We could see lower volatility as a result of the calmer mood, suggesting that the VIX index may fall when US comes back online. This is important because lower volatility will reduce the risks of raising interest rates amid the current environment of slower global growth and falling inflation expectations.

Already, we are seeing the slow uptick in market’s expectation of a September rate hike. The implied probability rose to 32% today. I maintain my view that December remains the month for rate normalisation, as long as US macro data, particularly inflation, continues to pick up in the coming months.

Turning to Singapore, the Straits Times Index (STI) was affected by the largely risk-off appetite, although good support was sighted at 2850. Further signs of stability in the global markets will strengthen the support at this level, ahead of the key 2800 handle. The MSCI Singapore Free Index, which IG’s Singapore Blue Chip is based on, is holding firm above 310, ahead of key 300.

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