Global markets are heading for a shakeout today after Chinese share futures plunged Friday night when the country’s stockmarket regulators moved to try and slow the mad cap advance in share prices.
Markets on Friday fell – Australia was down sharply ahead of the news from China, while bourses in Europe and the US sold off heavily after the Chinese moves were revealed.
Futures on Chinese and Hong Kong markets were down by 2% to more than 5% in after hours trading which will be translated to big early losses at the opening later this morning.
But that could change today after China’s central bank cut its reserve requirement ratios for all banks by a huge 1% (for only the second time ever) from today, in a move to try and get more money lent to struggling companies.
But much of this additional money will probably be lent to buy shares, offsetting fears of a fall from Friday night’s decisions by regulators.
China’s move on Friday night added to rising fears about Greece’s future in the Eurozone, the temporary collapse of the Bloomberg terminal system on Friday night and worries about the impact of the US dollar’s strength on March quarter earnings in the US.
As a result, shares in Europe and especially the US fell sharply with no sector spared some pain. Some market commentators talking about a “rout” on Wall Street on Friday night after trading had closed for the week, while other analysts suggesting we could be seeing the start of a big market correction.
But the developing loss of faith in China and Hong Kong will be the biggest unknown today – the share market futures contract had our market down 47 points when trading ended early Saturday morning.
Friday saw China’s securities regulator issue its strongest warning yet about the country’s stockmarket booms and tightened rules on margin lending while the country’s two stock exchanges said they would make it easier to short (bet) against stocks.
The announcements late on Friday (after trading) by the China Securities Regulatory Commission, the Shanghai and Shenzhen stock exchanges and two industry associations, sent shares down more than 2% in Europe and over 1.5% in the US, and raised fears of a sell-off in China later today where the main market has now doubled in the past year.
The Shanghai stock market closed the week up 2.2% and at its highest level since March 2008. That took the weekly gain to nearly 7%. As a result, the Shanghai Composite Index is up more than 14% so far this month and 33% so far in 2015, and has more than doubled in the past 12 months.
The Hong Kong market is up more than 17% in the year to date – with more than 10% of that happening in the last couple of weeks.
China attempts to prick shares bubble
.png)
Friday’s announcements put a limit on margin trading, along with the decision to allow short selling on two main stock exchanges (and expanding the number of shares that could be shorted to more than 1,000) had an immediate impact.
The H-Shares index futures quickly sold off, falling 5.6% after the announcement that came in after regular markets closed.
The moves seem to be based on the view that by increasing the supply of shortable securities and cooling markets, the boom can be pricked slowly without a crash.
At the same time on Friday, the China Securities Regulatory Commission “banned the margin trading business of brokerages from taking part in umbrella trusts". Allowing mutual funds to lend shares to short sellers will mean it’s easier for traders to bet on a pullback on the Hang Seng index in Hong Kong.
Markets in Europe and the US were slow to digest this news as they grappled with the surprise Bloomberg outage, the fears about Greece and weak earnings reports from General Electric and Honeywell (which showed the impact of the high US dollar in revenue and earnings).
By the time trading had closed on Wall Street, the major US markets had all plunged. The Dow dropped 279.67 points, or 1.5%, to 17,826.10 and ended the week 1.3% lower. The index turned negative for the year as a result of the fall.
The S&P 500 index dropped 23.83 points, or 1.1% to 2,081.16 and was down 1% over the week.
The Nasdaq Composite declined 1.51% to end the week at 4,931.82, down 1.1%.
Global bond yields also fell as investors fretted about Greece – the yield on the US 10 year bond fell to 1.86% and could go lower as investors seek safe havens.
The yield on the German 10 year bond fell to 0.08% on Friday night, and will dip into negative territory this week as fears about Greece grow.
The US dollar fell from around $US1.05 against the euro mid week to over $US1.08 on Friday night. The Aussie dollar fell back under 78 USc on Friday night as well to end at 77.82USc.
In Europe, the sell-off was wide spread and pushed markets into losses for the week as the China concerns added to the growing fears about a possible Greek default and/or its departure from the euro – something European Central Bank chairman Mario Draghi said on Saturday in Washington would not happen.
The Stoxx Europe 600 Index lost 1.8% on Friday night to be down 2.2% for the week (but still up 18% for the year so far). The Greek market slid 3%, and Germany’s DAX Index plunged 5.5% this week, the most since 2011 (after a 2.58% plunge on Friday).
In Australia, the futures market had the ASX 200 starting down 47 points – after Friday’s 69 point slump in the ASX 200, or 1.2% to a close of 5877.9 points. The All Ords lost 66.1 points or 1.1% to end on 5851.5. The ASX 200 lost 1.5% over the week.
