China, oh China… commentary after the daily summary for the indices here, this was spectacular!
- Hang Seng Index:
- Down 0.07% to 23 987, with a high of 24 117, and low of 23 888.
- Futures-implied spot performed worse thanks to the US futures opening lower, closing at 23 931. High at 24 139 and low of 23 894. (These December futures work a little bit wonky after the November futures closed as they have much higher intraday volatility, so it says little about the overall market.) Very little movement happened after the Hong Kong markets closed except for a blip around US market opening.
- Turnover was high to close the month, at HK$90.24 billion.
- Volatility fell! What? The VHSI fell 3.1% to indicate a Hang Seng Index volatility of 14.38%.
- Hang Seng China Enterprises Index:
- Up 1.19% to 11 145, with a high of 11 194 and low of 10 961.
- Futures-implied spot performed similarly, closing at 11 108, high at 11 192 and low of 10 962.
- Turnover was high here again, with HK$28.99 billion traded.
- Shanghai Composite:
- Up 1.99%! Closed at 2 683 which was the high to the index point, and had a low of 2 623.
- Shanghai A-Shares Top 50 was up by 3.95% to 8 498. Whoa! High at the close(!) and low at 8 145.
- The real kicker? Turnover at – wait for it – RMB401.95 billion! Hooolyy… Chinese investors are really going in much more to the stock indices, and the large caps are seeing a massive benefit over the overall index thanks to this. The index was regularly trading more than RMB2 billion per minute in open trading as well, so this wasn’t an IPO-effect rush – people simply traded obscene amounts on the open exchange during regular trading.
- Shanghai – Hong Kong Stock Connect data:
- Northbound trading at RMB2.35 billion, mostly in the afternoon.
- Southbound trading at RMB290 million, with RMB50 of these traded during the last 15-20 minutes of trading as the index was falling to close out the month. Chinese investors were probably seeing value here!
- On Southbound trading, a block trade of ~RMB100 million had probably been executed prior to market opening, as the market opened and didn’t significantly move from there until an hour or so into the morning session.
- HKMA monetary base data:
- The monetary base was up nearly HK$2 billion since my last update on Wednesday, and HK$1.4 billion on the day, totaling HK$1 340.7 billion.
- Most of this change, as per usual, occurred in Certificates of Indebtedness.
- Overall OEFBNs are increasing by HK$110 over the last two days, which isn’t explained by decreases in the Closing Aggregate Balances!
- NBFIs’ share of this was clicking in at HK$76.2 billion and decreasing by approximately HK$800 million on Thursday and HK$400 million on Friday. These are massive changes and might explain why the market was generally down on these two days (since institutional traders will want liquidity on hand to shift into new futures contracts as November delivery closed out on Thursday, and book-cleaning and cash reserve building at month-end for Friday). Other investors were probably so uncertain even though there’s a massive link to China that this was enough to push the HSI down. The NBFI holdings of OEFBNs is still remarkably low, and for example was not enough to reverse the gains in market positioning or OEFBN structure towards Tuesday’s features.
The strong increase in turnover, if maintained across the next few days, could really show a Chinese market that is getting ready for structural change and giving better indications that IPOs, seasoned offerings and general capital market development might be good to accelerate. I don’t think we will approach total turnover levels that are comparable to twice those of the NYSE on a regular basis, but the lack of significant news just shows that this was a spike as people sought to enter the market, and short-term turnover is less likely as trades need to settle in the Chinese market before a new trade can be made. Sure, one might see rushes for the exit the next day, but there are a lot of buffer systems in the market that restricts massive outflows on the intraday frame. This might increase the potential for price changes (why sell at a bad price when you think the market might just stop out? Who provides the buy-orders here when the market goes down?) but realized losses are not traded on in the same brutality as in other markets.
As for charting opportunities, there are not particularly many needing specific treatment, but the China A50 is important for the shock-and-awe factor alone!
Shanghai A-Shares Top 50:
We’re already above the last 38.2% Fibonacci resistance test (blue arrow) and the test above it at 8 540 (yellow arrow) might be important. Other than that, we’d have to use the inset fibs for future resistances, and only the 61.8% level here provides any real price action tagging. I would believe that we might see a bit of consolidation here around this level, testing between here and 8 160, as that represents the next Fib lower. I think the market might need a hook pattern here to advance further, and hooking around this fib level is probably our best bet for sustained moves. I mean, lust look at:
- That upper Bollinger band rejection on Friday’s opening! It might indicate that there should be some catch-up, but that surf I mentioned on Wednesday is in full effect!
- Fib clearing over the last few days as if they didn’t exist.
- ADX/DMI might be overextended. Having a break here to let that “mature” a bit and letting the MACD build steam might be a better alternative as I think a quick reversal might be in the cards unless this move gets some time to cool.
As for where I see the Shanghai Composite going forwards, into, say, end 2015? If things are going well rather fast on the political front, more IPOs come to market successfully, and there are signs of a property market revival, there could really be a much higher overall equity market capitalization in China. I don’t think $6-7 trillion domestically is out of reach, which would put the Shanghai Composite at 3 600 and give a P/E of around 16. Since I expect the market generally to increase the earnings I don’t necessarily see a problem with a 6 000 reading (~23 P/E with IPOs and other share offerings increasing the base). I really don’t have a problem with a domestic (not counting Chinese companies’ Hong Kong-listed stocks) stock market capitalization around $10 trillion, which would put it in line with many other markets with a stock market capitalization nearly matching GDP. If this is achieved during 2015, I will think that it is overvalued, but given the structural reforms and pricing in a premium rather than a discount I could still understand and justify it. (More on this on a later post.)
On other indices, Hong Kong financial institutions look to be long the market, even though they moderated their bets a little during Thursday and Friday. We also continued the performance fan-out with the HSI, HSCEI and Shanghai Composite, going from lowest to highest. In particular, the HSCEI might initiate a positive Bollinger band surf if it cracks 11 250 and 11 400, while the HSI will have a harder fight. It does seem like Hong Kong investors are piling in lots and lots of money into China, and where the Shanghai – Hong Kong Stock Connect doesn’t prove too appetizing, the HSCEI is a good substitute.
Also, if the trend during the week of a strengthening HK$ (went from 7.7575 on Monday to 7.7523 on Friday, before rebounding to 7.7549 in US trading) is anything to go on, then further market rallies might force a peg defense and action by the HKMA in expanding the Closing Aggregate Balances, which would possibly be the spark that really heats up the Hong Kong market again.
The net outflows into China through the Stock Connect seem to be rather well-matched by other inflows, and so far even allowing an increasingly strong Hong Kong dollar for this week, although the trade pattern meant ten yuan flew into China for every one that went into Hong Kong across Shanghai – Hong Kong equity trading. December will be a really interesting month to watch, and if you choose to follow this blog I’ll provide a front-row seat to the developments as they happen, day by day!