The rally party goes on, sort of

Most tellingly, European equities started the week on shaky footing, despite a relatively strong lead from Asia. This suggests that the intense up move we experienced last week may be losing momentum.

Stock Chart
Source: Bloomberg

The signs were already there this morning when Asia opened. Weak performance in the US markets last Friday pointed to a cautious start for Asian markets. However, halfway through the morning trade, Hong Kong shares rallied, followed by China, on a one-two combination of IPO news and speculations of more stimulus in the pipeline.

First, China Reinsurance Corp plans to raise up to USD 2 billion in an IPO in Hong Kong, which would be the first major offering in the Q4 for Hong Kong if successful. It would also be the third-largest IPO in Hong Kong after the $5 billion Huatai Securities IPO and USD 4.1 billion IPO by GF Securities, according to Dealogic.

Cornerstone investors have pledged USD 1.1 billion in investments, which shore up retail investor confidence. In addition, another Chinese state-owned company, China Huarong Asset Management, is planning to make a USD 2.5 billion public offering in Hong Kong this Thursday. This has driven the Hang Seng index up by 1.2% today, adding 272 points to close at 22730.93.

Second, hopes of more stimulus from the Chinese government rose as the markets digest the Saturday announcement by the State Council to increase tax support for shanty town development. PBOC also unveiled a trial allowing banks to borrow from the central bank using credit assets as collateral.

Chinese equities rallied in response to the stimulus news, where the CSI 300 put on more than 3% to close at 3447.69. Smaller-cap stocks benefited the most, with the ChiNext Index climbing 4.5%, compared to the 3.3% on the Shanghai Composite.

The surge in Chinese stocks helped sentiments across Asia. The Straits Times Index (STI) pierced through the psychological 3000 level, extending last week’s 7.3% rally, and ahead of MAS semi-annual policy meeting on Wednesday, 14 October. Economists are expecting a close call in the meeting between more easing and maintaining policy stance.

We have a short note on the MAS meeting here. Advance estimate of Q3 GDP will also be released on the same day. Australia, however, ended lower on the day, while Japan remained closed and will resume trade tomorrow.

Overall, it doesn’t feel right for the rally to continue, as there are no positive developments on the macro front. The sluggish start to the European session seemed to validate my view. The ‘no news or bad news is good news’ trade is somewhat risky to participate as you never know when the party will stop. I won’t advise chasing the risk rally, especially when US equity futures indicate a negative open tonight, and event risks littered this week.

 

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