The sun shines in Shanghai

Chinese equities rally

Global equity markets recaptured their reality denial mojo overnight, with Wall Street enjoying a boisterous session and currency markets partially awakening from their slumber. The real star of the show though was China, with both the Shanghai Composite and CSI 300 finishing over 5.0% higher on larger than average volumes. The performances of Big Brother also dragged the Hang Seng higher by 3.80%.

The chief reason for the outperformance by mainland China over the past two days lies squarely with their state media. Various state media outlets have suddenly started extolling the benefits of buying equities to share in China’s economic recovery. M&A speculation in the financial sector saw it outperform impressively, even the mainboard rises.

Retail investors dominate China’s equity turnover on the mainland. With a closed capital account, and the government managing most other investment avenues, China’s savings surplus can really only flow into real estate or equities. It is thus, not a difficult challenge to mobilise the masses, by extolling them to “fill their boots” with equities. The implication being, that if state media is telling them to, there is an implicit “letter of comfort,” that the government has their back. Much like the Federal Reserve is ostensibly doing these days, albeit in a less subtle manner.

The only problem is that we have been here before in China. A very similar situation developed during the rally of 2014 to 2015. Stock margin lending exploded as Chinese stares staged an incredible state urged rally. That exploded in tears, however, with markets crashing 40% and China having to deploy its “national team” to buy everything and steady the ship.

It will probably prompt the v-shaped recovery fashionistas in western markets to unleash another wave of buying as well. Expect more record highs in the Nasdaq for a start. China may well be doing the rest of the world a favour, with a potentially ugly Q2 earnings season upon us, by fanning equity market fires. Economics, though, has an annoying habit of winning in the end. Shanghai may be giving the world an equity summer of love, but history tells us, the party will end abruptly. The last one ended in 2015 with a 40% collapse in Chinese stock markets. That’s one heck of a hangover.

News breaking from Australia suggests that winter is coming, both seasonally and metaphorically. Australia’s Covid-19 hotspot in Melbourne is apparently prompting the state of Victoria to consider a new four-week state-wide lockdown. Covid-19 cases continue spiking in Australia’s second most populace state. The Australian dollar has immediately moved lower, and stocks have quickly given up the day’s gains. It is a sagely warning of the economic danger that Covid-19 continues to inflict on the world. Sadly, if the situation in the United States and across Latin America can’t ram that message home, nothing probably will.

The Reserve Bank of Australia (RBA) reports its latest interest rate decision at 1230 SGT today. Rates will remain unchanged at 0.25%, with the Victoria situation unlikely to affect that outlook. As ever, it will be what the RBA says afterwards that matters most. A very dovish outlook is certain. More noise on the possibility of negative interest rates, or a shot across the bow of the recent Australian dollar rally, could see the currency retreat and the pullback today in lucky country equities, reverse as quickly it started.

Bank Negara Malaysia announces its latest rate decision at 1500 SGT. Most “experts” are predicting another 25-basis point cut to 1.75%. However, I suspect there is a better than even chance of the BNM going a full 50 points. Negative inflation and a recent appreciation in the ringgit give the central bank wiggle room to be more aggressive, despite the precarious fiscal position of the government. A 50bps cut will be bullish for local market equities.

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