Do you like bold predictions? I do: if I get them right I can point towards it, if I get it wrong then I’ll let the prediction fade into obscurity. Prediction:
The Hang Seng Index will rally tomorrow, and be lifted by higher volumes of trade through the Shanghai – Hong Kong Stock Connect.
The relevant price and turnover data:
- Hang Seng Index:
- Closed at 23 373, low at 23 341,
- Futures-implied spot low at 23 311, closed at 23 316.
- Low turnover, at HK$65 billion for the day, down from HK$75 billion yesterday.
- Hang Seng volatility (VHSI) is down 9.9% on the week!
- Hang Seng China Enterprises Index:
- Close: 10 381, low: 10 354,
- Futures-implied spot low at 10 354, closed at 10 374.
- Low turnover, at HK$10.89 billion on the day, down from HK$13.54 billion yesterday.
- Shanghai A-Shares Top 50:
- Close: 7 455, low: 7 441.
- Turnover on the Shanghai Stock Exchange overall rose to RMB167 billion.
- Shanghai – Hong Kong Stock Connect data:
- North- vs.Southbound quota use: RMB2.61 billion vs. RMB250 million.
- The vast majority of the Southbound trade was done in a single block of about RMB230 million at around 14:45 local time.
- There was even some increases in the Southbound quota balance, implying that Hong Kong stocks were being net sold off in those minutes by mainland Chinese investors.
- Northbound purchases accelerated as the day progressed, with a few smooth but noticeable jumps and a higher base-pace of quota balance depletion.
As for the price levels, you are free to see the technicals on my Watched Charts for daily updates and look at the longer-term analysis for why I think we will have lift-off tomorrow. As for the HKMA monetary base data:
- The total monetary base fell below HK$1.34 trillion, driven only by decreases in certificates of indebtedness (cash). This is a negative, but it is so minor, accounting for roughly 20 points on the HSI, with several hundred points of standard deviation for any such monetary base change characteristics. Given the outflow from Hong Kong to China through the Stock Connect I am surprised that this number is not higher!
- The OEFBN ownership by NBFIs decreased again, to HK$77.5 billion. This is a possible bullish signal, as mentioned before since the NBFIs are committing cash to riskier assets, which likely end up in the market some time. This contrasts to yesterday’s increase, so maybe the traders are seeing an opportunity to buy at these levels!
Hit the jump for more detailed technical analysis discussions and a little bit of an extra tidbit on my spread reflections as applied to Hong Kong.
The case for a market level increase here is very strong, given most of the data shown above.
- Lower volumes at these levels means that it is easier to cross higher, and a lot of the technical analysis I did yesterday really already comes into play.
- Across all three indices, we’re at the very top of the expected area where the support should be starting to kick in, and so far it has done so, turning at a 6-, 5- and 10-point break of identified top supports for the HSI, HSCEI and A50 respectively. The price action was not massively impulsive off these levels, and it is largely more impulsive as you go down the list, with the HSI being weakest and the A50 being strongest.
- If the market turns up, there is a lot more trading to be done due to the Shanghai – Hong Kong Stock Connect, and Chinese investors haven’t really shown interest. Will a day of positive trading (open-market momentum has been horribly bad the last three days!) be the first to make them bite into the prospects of Hong Kong?
- We have NBFIs going in to the market again, and even a marginal closing aggregate balance increase (which doesn’t even compare to the decrease in certificates of indebtedness, but CABs don’t increase for no reason). They see a buying opportunity, and their inflow might take a while to neutralize the outflow of “dumb” money, but a positive signal is a positive signal.
- Volatility here is lowering down to the levels that the market were at in early November, before the recent push higher. If volatility increases it generally provides fuel to whatever direction the market is trending in, and if we have a lot of support lower then the path higher might be the path of least resistance. This is particularly true for the Shanghai A-Shares Top 50!
- Gains here would really make the ADX/DMI trend across all three indices perk up.
It will be really interesting to watch tomorrow’s price action, and in the positive scenario for the week close I see 23 700, 10 570 and 7 880 for the indices, with a neutral scenario being anything above 23 276, 10 300, and 7 380. Negative would be below these levels, or 23 220 for the HSI since so much resistance will be broken and it means that the next support will be at 22 780. For the HSCEI, breaking below 10 300 will probably mean support around 10 000 or even 9 850.
Then, what about the spreads?
Future-spot spreads were decreasing rapidly on the Hang Seng Index, going below 3 index points at one time near the close! (About 1 basis point!) Here, the inflation expectation is a little bit harder to pull off since Hong Kong is bound to the US monetary policy thanks to the currency peg. The risk-free rate then isolates the economic conditions on the ground, and this seems to imply that Hong Kong monetary conditions will “effectively” be easier.
This could be expectations of further inflows into the Hong Kong dollar forcing more liquidity into the system thanks to the closing aggregate balances, or less demand for money meaning that the rate needs to go down to incite demand at the level of supply. Both of these are possible expectations, and it is pretty hard to tell which it is when the HSI is down 4% from the week opening, but financial institutions seem willing to invest and there doesn’t seem to be an escalating rush out of Hong Kong.
The monetary base totals could be used instead, showing that more people (temporarily, at least) are putting their money in the bank and quite a few of them are pulling their money out of the Hang Seng Index. Then comes the shocker: HSCEI spreads to their December futures are 24 basis points! For two contracts listed at the same exchange with the same access to risk-free rate contracts, there is a near 3% difference in the annualized risk-free rate! This could be market inefficiency-based (more expensive to transact on the much less liquid HSCEI index) but that wouldn’t explain the divergence.
Arguably, liquidity in the Hong Kong futures market is far from the best and that takes away from this discussion, but the spread data seems to imply that people are willing to pay a lot more for the future exposure to the Hong Kong-listed Chinese shares than they are for the exposure to Hong Kong-listed Hong Kong shares!