Market commentary: Asia still driving the markets

Asian markets continue to be a major driver for volatility, materially contributing to set equities’ price directions.

China still remains a hot topic, and although investors seem to have slowly grown accustomed to the country’s equity market riding ups and downs on the back of, only partially successful, Government interventions, Chinese equity futures have continued to make headlines with concerning news.

In fact, whilst the Federation of Exchanges has ranked future contracts on Chinese equity indexes as the most liquid future market in the world, liquidity in such instruments have been evaporating over the past few weeks. This is the direct result of China’s attempt to increase regulations around futures trading in order to limit bearish wagers against its equity market.

Over the past few weeks, the PBOC has been increasingly raising margin requirements, while tightening position limits and beginning investigating algorithmic trading, in an attempt to limit the ability of investors to short sell equity futures; this in turn pushed traded volumes to record lows.

This type of interventions were meant to provide indirect support to the country’s equity market, but it may instead have the opposite effect, as index futures are the most common and easy to use tool available for professional and institutional investors to hedge their portfolios without dumping shares on the open market.

With futures’ volumes down from their June highs, some analysts are now starting to believe that the growing illiquidity in these markets is hampering institutional investors’ ability to properly manage their positions, leaving them no other option than to close their long term investments by disposing large amount of shares on the ordinary market.

Such scenario, which would most likely decrease the effectiveness of Government interventions in support of local stock market, could also end up costing the PBOC billions, and spread the down pressure to equity markets worldwide, causing another selloff.

While China continues to be an overall negative driver for global markets, Japan, the world third largest economy, may instead become a positive catalyst for international stocks. In fact, Japanese equities have soared overnight, after dropping on Tuesday and erasing all gains for 2015.

This morning the reference equity index for Japanese stocks Nikkei 225 added a stunning 1,343.43 points, jumping as much as 7.7% and closing at 18,770.51. Today’s performance represents the steepest advance witnessed by the Nikkei since the aftermath of the 2008 financial crisis, and has contributed to spread a “buy mode” to most of the other Asian markets.

Australia’s S&P/ASX 200 advanced 2.07%, the Shanghai Composite Index gained 2.30% while the Hong Kong main equity index closed 4.10% higher. Although this sudden rally may prove to be a short lived rebound, driven by buyers re-entering the Japanese market at years-low price levels, some analysts actually believe that this could instead fuel a global rebound able to pair some of the losses recorded in August.

European markets are supporting this view, as they opened higher this morning, with all major indexes gaining between 1.5% and 2%, and US futures, indicating that stocks on the other side of the Atlantic are poised for another strong opening.

Although the current prolonged high volatility still commands a cautious approach, investors should still be in time to enter the market and benefit from the ongoing stock rally, which some traders think could run through the rest of this week.

Disclaimer:

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.