One clear theme which has garnered focus in the past 24 hours has been the trading behaviour of the Chinese retail trader on the outcome of the weekend Fifth National Financial Work Conference, IG strategist Chris Weston says:
The message from the conference has been widely discussed, with calls to impact over the medium-term for stronger financial regulation. The creation of a new regulatory oversight body named ‘The Committee of Financial Stability and Development of the State Council’ has been put in place as a key priority, with the view to focus on systematic risk, better serve the real economy and deepen financial reform.
This was all held behind closed doors, but the message has resonated with the trading public. Increased regulatory oversight and possible greater efficiencies in managing the risks in one of, if not the most important business sectors in China should be taken well by overseas institutional investors, who are looking more favourably at Chinese equity and fixed income over a longer period, and these regulatory measures are a medium- to longer-term proposition anyhow.
However, as a trade the Chinese retail trader tend to find their inspiration from the message they hear from the government, central bank and other regulatory bodies and the message they heard here was sell stocks, sell crypto-currencies and perhaps even take a less positive stance on property, although this asset class is obviously not traded on an exchange and subject to daily swings like equities are.
The wash-up has been some sizeable moves in small caps and high growth, innovative companies, with large caps under pressure too. Offshore indices in Hong Kong saw good selling too, although the medium-term trend remains higher and the gains in the Hang Seng should be seen more as a macro play on the low inflationary dynamics in the US, and the more positive feel towards emerging markets than what Chinese retail traders are doing.
However, as we often see its keep calm and rotate asset classes in China and in this case we have seen money rotate into commodities, with iron ore futures romping ahead. The spot fixing was 1.6 per cent higher and ok we can probably throw in tailwinds from record steel output and solid economic data in the shape in industrial production and Q2 GDP, but on the whole this is a speculative driven market and perhaps this is another reason why we haven’t seen outrageous moves in the UK listed miners.
Still, being long energy and materials is where the flows have been headed in recent times and these moves we have seen in bulks and base metals won’t hurt one bit.
Interestingly, the AUD has not seen any love from the support for commodities, with some of the heat coming out AUD/USD after the recent rally and price currently oscillating around the 78 handle. This seems a function of profit taking, although the moves in China could be seen a reason to bank some profits, although that is a stretch.
Tactically, it could also be good time to reassess AUD longs, because while we have RBA minutes today and June employment data on Thursday we need to consider that on Friday we have two RBA members speaking and if the AUD is genuinely starting to make them hot under the collar, with a view the AUD strength could pose problems for their inflation outlook then this is the forum to start talking down the move. Friday afternoon and the period between 12 and 2:30 pm subsequently pose a strong event risk for the AUD, so factor that into risk management.