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This week’s big event risks were centred on China's GDP and the ECB meeting, although some US data may attract market interest.
Chinese growth numbers puzzled more than illuminated the markets. While the headline Q3 GDP is a tad stronger than expected at 6.9%, it still represented the slowest pace in over six years. Moreover, growth in Q1-Q3 stood at 6.9%, threatening to miss the official 7% target.
On one hand, some investors are increasingly eyeing more stimulus from the Chinese government in a bid to rescue its full-year GDP goal. On the other hand, it is undeniable that China is facing a longer-term slowdown as economic restructuring trudges on. In fact, the more resilient services sector is pointing at continued efforts to transit into a higher-quality economy.
There is some chatter that domestic investors are returning to smaller-cap stocks because they expect a stronger service sector to benefit these small companies. The ChiNext Index jumped 3.2% today, led by consumer staples, information technology and healthcare sectors.
This helped the Shenzhen Composite (SZCOMP) outperform the blue-chip Shanghai Composite (SHCOMP) at 2% versus 1.1%. The shift in sentiments in the afternoon saw Chinese equities break away from other Asian indices.
SHCOMP restrained by 3500
Still, the SHCOMP is not making much progress. Despite today’s rally, the index is still capped below the pivotal 3500 level. The simple reason is that prior to black Monday on 24 August, 3500 was deemed as the line in the sand for the Chinese government to support the domestic equities. As such, it is fair to say that many investors may have bought SHCOMP shares on approach of 3500 at that time, thinking that state buying will protect the downside.
Clearly, they have gotten stuck since the index fell below the handle, in line with the global stock rout. This suggests that there is considerable selling pressure above this level as those stuck in long positions are waiting to get out. Until this formidable resistance is broken, we are unlikely to see further upsides in the Chinese markets. Consolidation will prevail.
Nowadays, it is seldom that you see Hong Kong and China moving in different directions. Today is one of those days, and this was because of energy counters. The selloff in the energy sector after yesterday’s slide in crude prices, dragged Hong Kong and Australian shares lower on Tuesday.
In addition, reduced volume probably also aggravated the decline. The volume in Hang Seng Index and the ASX 200 was 39% and 13.3% lower to its 30-day moving average. The Nikkei also saw thin volume, but it advanced 0.4%, recouping almost half of the losses sustained on Monday.
Central bank risks ahead
I expect that investors are also retreating to the side-lines ahead of several key central banks’ meetings, starting with the ECB this Thursday, followed by the US Fed and BoJ next week.
Expectations of the ECB to talk up prospects of an augmentation to its QE programme are on the rise. There is an increasing pressure on the bank to do more after September's inflation in the euro-area turned negative for the first time in six months.
A slowing global growth, weighed by decelerating momentum in emerging markets, and a stronger trade-weighted EUR are posing as downside risks to the eurozone economy. This means we may see some dovish remarks from the ECB on Thursday. EUR/USD popped back above $1.1350, as retreat towards $1.1300 was rejected.
It is telling that the Dollar Index is swaying sideways within $94.50-$95.00 as traders remained uncertain about the timing of the next Fed hike move. Next week’s FOMC may shed some light on the matter, although given the recent rhetoric, we may not see anything new from the meeting. It has perhaps come to a point that it does not really matter if we hike in October, December, or early 2016.
It is obvious that volatility in the markets is here to stay as long as the Fed rate hike is delayed, with new language (or excuses) explaining the indecision. My personal view is that the Fed should have raised rates earlier to remove the uncertainty in the financial markets, and embark on a very gradual policy tightening.
Alternatively, they may announce in unequivocal terms that they will not increase rates for x period of time. There is research that suggests the current monetary policy in the US is inducing a tightening effect on the economy. The San Francisco Fed released a research report that suggests the current natural rate of the US economy is actually at -2.1%!
Signs of tighter financial conditions were likely to have been a major consideration in US Fed’s decision to leave rates unchanged. However, the financial conditions appeared to have improved since the start of October, according to the Bloomberg US Financial Conditions Index. This implies that we should not rule out a rate hike by end of the year. As such, rhetoric around October FOMC is critical to setting the tone for December’s meeting.
In Singapore, the Straits Times Index is looking perfectly happy sitting on top of the 3000 handle, but upside potential is expected to be restrained ahead of next week’s barrage of event risks.
The STI fluctuated between mild gains and losses today, supported by consumer staples, but pressured by the financials sector. We could see the index moving sideways within 3000-3050 this week. I think it is unlikely we will hear any market-moving announcements from China ahead of next week’s fifth plenum of the 18th CPP Central Committee.
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