Asia to see a cautious day

Asia is expected to see another day of cautious trading, as the higher close in the European indices are unlikely to significantly boost sentiments.

Source: Bloomberg

Although we could see better interest ahead of the US markets’ reopen after a three-day weekend, there is no doubt investors are going to focus on China, after yesterday’s mixed performance. Smaller stocks were in favour while the blue chips were under pressure. ChiNext managed to close higher by 2.1% whereas the China A50 tumbled 4.7%, accompanied by a 3.4% drop in the CSI 300.

There was a fair bit of talk about circuit breakers and China’s falling FX reserves. China is looking at using the circuit breaker mechanism to put a lid on market volatility. The Shanghai Stock Exchange is considering a plan to suspend trading for 30 minutes in stocks, convertible bonds, stock options, index futures and other stock-related securities when the CSI 300 swings in either direction by 5%.

If the Index rises or falls by 7% or if it swings 5% after 2.30pm local time, trading will be halted for the rest of the session. While the authorities are planning to strengthen the management of market volatility, they also think the current market conditions have stabilised.

The China Securities Regulatory Commission (CSRC) said on its microblog on Sunday that the Chinese markets were more stable and risks related to elevated leverage levels have waned. The China’s stock regulator added that the state margin lender, China Securities Finance Corp (CSFC) would continue to support the market through ‘various means’.

China’s reserves fell by the most on record in August, dropping USD 93.9 billion to USD 3.557 trillion. Admittedly, there was some relief that the fall had not been larger. Some analysts were looking at a drop amounting to as much as USD 200 billion.

Nevertheless, China will be facing a difficult situation, where efforts to support the yuan may be increasingly untenable. Excessive intervention will also tighten domestic liquidity. The drop in reserves picked up pace after the yuan devaluation on 11 August, which raised fears of competitive devaluation and concerns about the Chinese economy.

According to Reuters, policy insiders revealed that the Chinese government was taken aback by the international outburst over its exercise to make yuan more market-determined, and is likely to keep yuan on a tight leash in the near-term to head off more talks of a currency war. As mentioned earlier, the G20 finance leaders generally accepted China’s argument that the adjustments to its exchange rate in August were a step towards a more market-determined mechanism.

Meanwhile, Japan and Australia opened on a positive note, heading higher at last check. Singapore’s STI may hold above 2850 today, should Chinese equities show more signs of stability. On the data front, Chinese trade figures are due anytime today. Economists are looking for a slower drop in exports and imports at -6.6% y/y and -7.9% y/y respectively. Trade balance is expected to widen to USD 48 billion.

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