Chinese markets were really, really active all last week, with the Shanghai Composite alone racking up much more than RMB2 trillion (no error there!) in total turnover, with much more icing on the cake. Here’s the big results of Friday’s feeding frenzy across China and Hong Kong markets:
- Hang Seng Index:
- Spot high-low-close-return: 24 171 / 23 773 / 24 003 / +0.71%
- Futures-implied spot HLC: 24 209 / 23 753 / 24 087
- Turnover, at HK$147.8 billion, is the highest it has been in almost seven years.
- Think about that. It’s higher than the AIA float. Higher than the ABC float. Higher than the Chow Tai Fook float. Sure, the general opening of the Chinese stock indices to the world is a Continuing Global Offering… but the frenzy is getting incredibly big. The only higher volume periods on the HSI are from the late-2007 peaks, when the stock index was going from ~26 000 to ~32 000 in a month.
- Implied volatility from the VHSI up 4.41% to 17.03.
- Trading that paced from gains to losses and back to gains again afterwards with violent spikes either way. This was generally a theme for all stock indices under watch, to be honest.
- Hang Seng China Enterprises Index:
- Spot high-low-close-return: 11 761 / 11 413 / 11 600 / +1.04%
- Futures-implied spot HLC: 11 771 / 11 414 / 11 615
- Turnover massive at HK$50.84 billion, only beaten by one day in early 2013 for the past six and a half years.
- Shanghai Composite:
- Spot high-low-close-return: 2 978 / 2 813 / 2 938 / +1.32%
- Shanghai A-Shares Top 50 HLCR: 9 906 / 9 292 / 9 675 / +2.10%
- Record-breaking turnover of RMB639.19 billion, which added to the more than RMB400 billion trade on the Shenzhen Stock Exchange, meant that the total Chinese market turnover, on Friday alone, exceeded RMB 1 trillion.
- Shanghai – Hong Kong Stock Connect:
- Northbound quota balance use at RMB2.57 billion.
- This was the result after falling from a high of RMB2.84 billion and fluctuating between increasing and decreasing throughout the day, implying sell orders were active across the link as well.
- No pattern was seen between movements in the Northbound link and gains/losses in the Shanghai Composite.
- Southbound quota balance use at RMB1.43 billion.
- Much faster quota use during the afternoon, save for one block trade sell around 14.30.
- Northbound quota balance use at RMB2.57 billion.
- The Kong Kong dollar gained again, closing the week out at 7.75116 to the US$. Monetary base intervention is close now, and has increased marginally throughout the week, and financial institutions are buying in marginally (a few tens of millions HK$ per day) using HKMA liquidity to finance their purchases.
Looking at the longer term, we get very different outcomes between where the different indices positioned themselves over the week. The HSI still has valid technical analysis from the recent past, and we don’t really need to change the outlook significantly, although we do have a volume explosion that could set the index of for a massive move higher should more cash flow into the Hong Kong markets and be doubled into liquidity by the HKMA to blow out money supply and allow stabilization against the US dollar.
The HSCEI is breaking very long-term trends by being above the 11 230 level, but there is still a litany of peaks that have to be overcome, from 11 645 all the way up to 14 500 at close intervals, so the resistance will be thick thick thick, although volumes and monetary base data, together with a very strong China link will prove great stimulants for the index to break the market.
Finally, we have the Chinese mainland stocks, and then particularly its large cap A50 index. This one has literally broken the (daily) charts, and deserves a special, technical look on a weekly candle basis:
Yes, that wick is Friday’s high-close difference… but it looks like the markets will test the 10 000 – 11 000 range in the coming week. A good thing to look at could be the longer-term past outlooks to find decent peaks to anchor expectations to.
I am getting slightly concerned about these markets rallying this much, but there are a few reasons (not necessarily good ones) to stay bullish, which I will outline below, after the jump.
What further hope is there?
- Turnover ignites rallies, and the high turnover numbers are often near the start of massive moves, and when the turnover turns is when the move starts fizzling out.
- Valuations are not insane in China, given that the expectations are for further opening and developments in the markets.
- More (although less concentrated) IPOs. Now there is less of a cash-holdup getting Chinese investors to keep money out of the markets and a pent-up liquidity can get unleashed and the general “pop” effect has essentially been forced on the market by the regulators now, so more IPOs means more momentum.
- Hong Kong enjoys a lot of different benefits:
- Currency tied to the US dollar means that this currency is now very attractive from a policy perspective. The RMB also enjoys this but China won’t be as influenced by this as Hong Kong (smaller economy, more trade per GDP) will be.
- Exposure to China in general, with lower valuations in dual-listed shares means that these stocks are attractive for global money managers.
- If the monetary base or closing aggregate balances start blowing up, this will add much, much more momentum to the market, all in an environment where the base currency is extremely attractive to invest into, as opposed to other risk-on rallies.
- The markets are not overextended from a technical perspective, as they are starting to get in China.
- Hong Kong money managers (“smart money”) are not exiting their positions, but rather building on them. They could of course be hedging, but as they say, cash is king. It looks like none wants the kings protection yet, or any protection for that matter since…
- Volatility is still relatively low at 17% implied volatility, which is slowly rising but less than the three-month average, and these movements have been relatively slow. I would start getting worried if volatility gets above 20% or 25% with 15-30% daily swings, and use that as a caution signal (might be too late by then though…) but these ~5% moves in volatility daily are not large enough to spark massive falls.
The employment numbers in the US this Friday, being an eye-popping beat with 321 000 added jobs in the US economy as reported, means that there is room for more policy divergence, and some analysts are even moving their forecasts for an interest rate increase from the Federal Reserve up a bit. Although I do personally see how the Fed will keep their policy stable for longer than others are expecting (interest rate increases – with a steadily increasing dollar, lowered commodities prices and thus a double detriment to imported inflation – are exceedingly unlikely) it does add to the allure of the US dollar as a holding position versus yen, euros (and the HUF or SEK trailing trade), pounds, or any of the commodity currencies like Aussies, Loonies, or Norwegian kroner (wanna start calling them “Salmons”?).
The jobs report already sent the yen to nearly 121.7 against the dollar, and thus the Nikkei 225 futures to above 18 000, despite nary a Mrs. Watanabe trading those contracts! With the yen falling in excess of 1%, it means that things are even more attractive to invest in in foreign currencies, and Hong Kong stocks (which is the only worthwhile access that Japanese retail investors will have to Chinese direct exposure) will add to this by looking set to rise from several factors.
It could be a very, very interesting week in Asian markets, starting with the live reactions to the currency changes and export pricing outlooks that are now set after the US employment report came out late on Friday local time.