The week didn’t end on the relatively sour note I expected yesterday, so I don’t have a clear “rush for the exits!” signal I expected. Still, I really think just because there is one good day of trading inside the current range it doesn’t mean that there are great positive offshoots, and the biggest reason to cheer for today was the volume increase to HK$72.6 billion. We still rejected the 252- and 189SMA’s, and the big clear candle is one of those typical Hong Kong opening fakes from the relatively odd pre-opening trade that the bourse does, while open trade data draws a long.legged doji candle instead! So sorry, I’ll hold back on the technical analysis for a while in favour of actually gathering CAB data and building some GARCH models, or other things that spike my attention.
In an environment when there have been several 1%-per-hour equity swings in the global futures markets, and 0.5% dittos on major currency pairs I don’t really feel qualified to call levels to be completely honest. Just saying that when market participants are going “things are bad so we hope for stimulus” I prefer to be short, and I have found from zero to no fundamental reasons to believe that the 2% bounce we saw today in Nikkei and S&P 500 futures to be anything else than hopes and wishes. Some more commentary after the jump.
Bloomberg reports on worries that the Hong Kong-Shanghai Stock Connect has no real timetable, and I surely share them, as you could probably estimate from my analysis of CABs yesterday and other posts I have made recently. Go back and read the overwhelmingly negative sentiments that this brings me, the positive counterpoints of which I have posted previously. The scarce positives from a financial standpoint probably include more political stability in Hong Kong before the link does go live, more chances for moderate monetary easing in China due to swap agreements indicating a reference rate cut, and potential increases in the latitude allowed for loan growth stimulus to perk up the housing markets. (Credit to Bloomberg for all these links and reports.)
With some luck some more targeted easing can go through the market, and interbank rates going down would probably be a relatively good sign of easing, although I don’t expect new loans data or a rate cut to be available before the link goes live in any case. As for a rate cut, I agree with the Chinese analysts estimating that more targeted easing measures to get banks distributing loans to the right places rather than the wrong ones is a pretty good idea, as the direct interest rate cut likely has very sticky consequences, both in the casual use of the term and the one economists would use.
My money would be on Required Reserve Ratios to be cut further, somewhere in the 50-100 basis point range on average across the economy, with a higher expectation (around 100-150 basis points) for non-national lenders. Although very hard to get a good grip of on the average for the whole economy, my estimate of around 20% average RRR leaves a lot of potential cuts for the regulators to uncover value here. (Remember, due to fractional reserve banking giving a total financing that equals Capital / RRR, a 100 basis point decrease from 20% would free up 5.26% of current capital in new loans over time.) The RRR is the fastest policy measure that China has, and given the quick loan growth it generally enjoys, raising it is a very effective way to mop up excessive liquidity. I really believe that the slightly faster, non-sticky approach of RRR management could be highly favourable given that the full extent of policies after the Fourth Plenum are not known yet, and policy agility will be at a premium to both make new policies and the Stock Connect itself a success.
Hopefully, there will be a little silver lining to this highly annoying development uncertainty on the Stock Connect, although that is relatively minor still. The link will happen, the political will is there and the benefits, as far as I can tell, are in favour. A possible issue would be that Chinese brokers prefer to let at least some of the volatility in Hong kong die down, hoping that a Fourth Plenum could add a sort of floor, and that financing in China will make the whole “Continuing Global Offering” of China Inc. a lot more easy when looked at from a share-issuing perspective. IPO-goggles on from now on, people!