There are few other ways to describe the price action on the Hong Kong indices that I find more fitting than biting into a bitter, grass-tasting fruit with lots of nutrients. The charts are all available on my Watched Charts page, as per usual.
Price action in Hong Kong overall, however, was on a different level today. This was spread between both the Hang Seng Index and the HSCEI.
Looking at the Hang Seng Index chart, a few features stand out:
- The candle in isolation. Opening at 24 313 after pre-opening trade, and falling to 23 797 by the close, (516 points, or 2.14% of the Friday closing price) is no small matter, especially given the non-existing wick lower.
- Intraday mechanics were even scarier, as price fell consistently from the open to 23 850 by 10:20 am, then recovered to a higher level above 24 000 only to fall consistently after the Japan GDP data was released at 11:00 am.
- Volume was high, at HK$83 billion. Not extraordinary, but very, very scary given market action like this.
- The 63-day SMA was acting as a resistance at 11 am, but on the way down in the morning it was hardly even a speed bump. Not a good sign either…
- Thankfully, the 126-day SMA provided some support and price closed one puny point below it after the post-market adjustment.
- By the massive increase in range over the last two months of trading, this day really did a number on the ADX/DMI with both DMI’s increasing.
- However, by closing at the low, it takes two days of back-to-back increases to force a bullish divergence here.
- By opening at around 24 300, the market thus consolidated a support/resistance line at that price, given by the bounce in August and hook price action during the September sell-offs. Punching above this level now becomes increasingly difficult.
The Hang Seng China Enterprises Index is no better:
- We crushed… the 63-, 126-, and 21- day SMAs today! Wow!
- Speaking of MAs, the 252 SMA will start dropping in a week or two unless price goes up by 10% in that time. Not unheard of, and the 252 SMA moves very slowly (the difference between 253 days ago and today, divided by 252, to be exact) so a little lag probably won’t hurt, but the SMA will thus be falling by nearly 1% per month if these levels are the consistent pricing the market gives Hong Kong-listed Chinese stocks.
- The HSCEI is in fact testing the November lows so far at these levels. Scary!
- The same ADX/DMI mechanics can be observed here, but the failure to open higher than it did means that the ADX/DMI is heavily negatively biased on these charts, and even though both DMIs are on the up, the DMI- is up so much that it almost crossed the DMI+ even after a week of positive new ranges being created!
- RSI values fell back below 50 on the HSCEI.
- At least volume wasn’t as big, instead the HSCEI posted just about average on the last 20 days, with a volume of HK$14 billion.
What other data was there to look at today then?
First, the Northbound trading link on the Shanghai – Hong Kong Stock Connect got stopped out at RMB13 billion at 1:59 pm, while the Southbound trading link only used RMB 1.77 billion out of 10.5 available. The bias is not too strange; after all the mainland Chinese can both day-trade and have an easier time shorting Hong Kong stocks, while the Hong Kong investors today were restricted to buying since their trades haven’t been settled yet, and may be sold tomorrow at the earliest. A continuous fall is probably not something that the mainland Chinese are too interested in buying into, so keeping cash at the sidelines for today might prove prudent in the longer run.
In other events, the monetary base is up in Hong Kong today, to HK$1.342 trillion, increasing by a little bit more than HK$1 billion, due to increases in certificates of indebtedness ( = cash, these certificates is what Standard Chartered, HSBC, and Bank of China generate when they print bills). The Non-Bank Financial Institutions are using slightly more liquidity today to the tune of roughly HK$300 million, but this is not yet enough to make a noticeable difference to the trend of NBFI’s investing the liquidity they can get their hands on. However, this might really be worth watching in the days ahead.
Over the longer term, the technical analysis still looks rather good though, massive negative trading aside. Keep in mind that this is largely driven by Japanese market sentiment at the moment, and that can and will change repeatedly throughout the week as more data, Abe’s potential announcement of any snap election (or lack thereof!) and BOJ meeting being held. As was already shown on the Japanese market, this is a blip on the radar.
Things do look worse in Hong Kong, suggesting that a lot of local investors traded their HSI/HSCEI positions for positions directly on China’s Shanghai Stock Exchange through the Shanghai – Hong Kong Stock Connect. From an arbitrage perspective this looks reasonable, and suggests that more money is flowing out of Hong Kong thanks to its local investors than what foreign investors are piling in, at least today. Why hold the same share of a higher valuation in Hong Kong when you can get it in Shanghai if you’re a buy-and-hold with no yield-enhancing strategies or liquidity needs? This process might take a while, especially for the first few weeks when there is not any particularly large pool of Chinese shares held in Hong Kong to sell against, making the link a funnel out of the Hong Kong dollar and the local indices unless overseas investors step in.
Yuan trading extension:
There are however some great signals that foreign investors will be more able to step in in the future! Bloomberg is reporting on both the opening of Frankfurt as an offshore RMB clearing center, and the discussions between China and Australia to do the same and extend trade agreements further between the two nations which have an incredible amount of trade between them. The article on Frankfurt developments gives particularly good indications since it describes the liquidity situation in RMB, stating that liquidity is good around the clock, not just in Chinese opening hours.
Extending this to Australia that China imports a lot from means providing more opportunities for Australia to hold yuan, and this could be a very important step on conducting more commodity trade in RMB, making sure the currency “gains legs” throughout the global supply chains and commodity trades. The extending of a 50 billion renminbi RQFII quota to Australia is a great olive branch, and provides even more opportunity for circulation of the RMB abroad, allowing more of them to wind their way back to Hong Kong and be invested through the Shanghai – Hong Kong Stock Connect’s Northbound leg, hopefully.
Bitter bites today, but at least they are nutritious. With any luck there will be benefits in the future!