Chinese equities post worst month in 2 years

Friday, July 31, 2015

Chinese equity markets have had their worst month since 2013 as both the Shanghai Composite and CSI 300 showed no signs of stemming the outflows. Mainland stock indices have lost over 13% throughout July, building on June's near 7% declines as policymakers tightened controls in an effort to slow the pace of gains throughout the first half of the year. Having added over 60% in the first six months of the year fears of a bubble developing in the Chinese stock market as investors increased leverage prompted officials to tighten margin lending criteria. The decision ultimately forced retail investors to sell high quality stocks on any margin calls while leveraged plays exaggerated downside spikes as losses snowballed. Significant state intervention has indeed helped prop up the market and has prevented any further protracted losses but the financials and industrials have suffered heavily and market volatility remains high.

The dollar managed to hold onto its gains yesterday despite slightly weaker than expected Q2 GDP data. The dollar index closed 0.6% higher from the previous session against a basket of major currencies, trading as high as 97.773 at one point as investors grew increasingly confident that the US Fed would push to increase rates in either September, October or December this year. Market participants were expecting the US economy to expand by an annualised rate of 2.5% q/q in Q2, however, the advanced figure fell short at 2.3% q/q. Still, economic growth was up substantially from the first quarter which saw growth data revised up from -0.2% q/q to 0.6% q/q adding further support to an incoming rates rise. The dollar index seems to be back on its upward track after a brief correction since mid-July as investors held out for further details from this month’s FOMC statement. Having posted steady gains over the past few sessions we could see any extension of the upward rally target the recent high at 98.147 before attempting to converge on H1 highs towards 100.00.

Investors will be paying particular attention to today’s Bureau of Labor Statistics Employment Cost Index which will offer further insight into how much compensation employers pay out for the same position over time. Market analysts expect the quarterly data to see a 0.6% increase in the ECI for Q2, but switching to annual data it seems employment costs have struggle to lift out of the 2% range that has persisted over the past few years. Any encouraging signs in this reading would certainly placate the sceptics and indicate the US economy is performing well. We are also anticipating the release of the Chicago PMI and the University of Michigan sentiment index which will add further colour to the US economic backdrop.   

Shanghai Composite posts significant losses in July

SHCOMP Index Shanghai Stock Exc 2015 07 31 07 39 39

US GDP bounces back in the second quarter

GDP CQOQ Index GDP US Chained 2 2015 07 31 07 52 07

Events for today

0005

UK

Jul

GfK Consumer Confidence

0030

JP

Jun

CPI

1000

EZ

Jun

Unemployment Rate

1330

US

Q2

Employment Cost Index

1445

US

Jul

Chicago PMI

1500

US

Jul

University of Michigan Survey

Topics: GDP, US Fed, China, DXY
More from: Kash Kamal