Asia Open: Nothing quite like China’s regulators to foster a bull market

Market Analysis / 3 Min Read
Stephen Innes / 07 Jul 2020

US equities were stronger Monday, the S&P up 1.6% after China's CSI300 rose 5.7%, taking the index to its highest since early 2018. 

The S&P 500 rallied for a fifth session with tech gains pushing the Nasdaq Composite to a record high. Although consumer discretionary stocks were the best performer of the S&P500, it was IT shares that boosted the index the most. For equities, the virus spread in the US is a risk to the outlook. Still, the extremely low positioning outside the mega-cap growth stocks gives investors comfort to maintain cyclical exposure.

The catalyst for the move was an editorial in the China Securities Times which said that fostering a "bull market" post Covid-19 is now more important than ever to the health of the economy. It remains to be seen whether we see another repeat of the euphoria of the 2015 Chinese stock market rally, but it certainly seems like retail is happy to buy into it; according to reports, there’s been a 30% increase in new brokerage account openings in July.

China's army of retail investors seem to be perfectly able to look through the worrying Western media headlines of another global coronavirus record; instead, they’re listening to the enthusiastic chorus from the nation's influential state media which are universally singing bullish from the same song page. Reading between the lines, can we finally expect the PBoC policy deluge the market has been hoping for? The central bank is still providing liquidity via its re-lending quota and SME loan purchase scheme, though this may differ from what the market’s looking for, i.e. aggressive interest rate and RRR cuts.

Green screens in Asia were echoed in Europe, and US equity futures point to a positive open. The strident infection rates in Covid-19 "hot spots" in the US and elsewhere continue but appear less disconcerting to markets, perhaps because the mortality rate has not yet picked up or robust US activity data has diverted attention.

What’s interesting about the move in equities right now is that non-us markets are leading it.

 

Gold Markets 

Gold edges higher as Covid-19 cases increase concerns and offset positive data; upside is intact but USD1,800/oz is stiff resistance.

Gold managed to trade up despite a rise in "risk-on" investor appetite and Covid-19 concerns – which don’t appear to be going away – are providing underlying support. US fatalities are now above 130,000 and, as US cases approach 3m – about a quarter of the entire known global caseload – the pandemic has become a contentious political issue.

Given the genesis of the risk on move was a China Times article encouraging China retail army of investors to buy stocks, gold investors quickly looked through the market pump.

One reason the markets remain positive on longer-term gold is government spending and accommodative monetary policies outside the US. The US Administration reported some 51.1m jobs were protected by a high-profile pandemic aid program, by a colossal USD521.5bn. And the resurgence in Covid-19 has seen consensus among US commentators, after a long weekend reflection, that the US is going to double-dip. The point for gold is that spending has been at least partially successful, and more stimulus or helicopter drops may be needed. As government debt rises, gold tends to benefit.

 

Currency markets

FX enjoys a "risk-on" mood, although currencies are not showing the same kind of unbridled enthusiasm as Chinese equities. An already strong rally in China's stock markets was given additional impetus by a front-page editorial in China's Securities Times. 

Follow me on Twitter: @Steveinnes123

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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