May a distressing month for China markets

The Shanghai Composite is down for a second straight month. While it rose 3.3 per cent yesterday after Goldman Sachs raised its odds for MSCI inclusion, trading in the measure was otherwise subdued in May, and bearish bets have been increasing.
The Shanghai Composite is down for a second straight month. While it rose 3.3 per cent yesterday after Goldman Sachs raised its odds for MSCI inclusion, trading in the measure was otherwise subdued in May, and bearish bets have been increasing. PHOTO: AGENCE FRANCE-PRESSE

Currency, stocks and bonds down for second month running, with no respite in sight

BEIJING • Chinese investors have taken the "sell in May and go away" maxim to heart.

The nation's currency, stocks and bonds have all fallen for a second straight month - the first time that has happened since at least 2006, according to data compiled by Bloomberg. The yuan is heading for its biggest monthly loss since last year's devaluation with a 1.6 per cent decline, while the Shanghai Composite Index fell 0.7 per cent even after rallying yesterday.

Government bonds are slumping the most in 12 months, with the 10-year sovereign yield rising nine basis points.

Investors turned more bearish as April economic data trailed estimates and a high-profile warning about China's debt burden by the People's Daily, the Communist Party's mouthpiece, dampened hopes for more easing.

With little sign of the panic that gripped the nation's markets earlier in the year, traders are now shifting attention to upcoming key events - the Federal Reserve meeting in the United States and MSCI's decision whether to include China's equities in global benchmark indexes.

"The market's expectations are that the rebound in the economy isn't likely to continue and the government won't implement massive stimulus," said fund manager Dai Ming at Hengsheng Asset Management in Shanghai.

"Things are not likely to improve immediately in June, so there isn't much room for upside."

EXTERNAL RISK

Various signals sent by the policymakers indicate that there will be no more massive easing. This is adding pressure to the market, as the pending U S interest rate decision continues to be the major external risk that will directly affect the currency, which in turn could bring tightening pressure on onshore liquidity.

XU YUEHONG, an analyst at Bank of Communications in Shanghai.

The yuan fell 0.05 per cent to 6.5851 a US dollar yesterday afternoon, within 0.2 per cent of its five-year low reached in January. It was trading at 4.7698 against the Singdollar.

The end of a temporary sweet spot that China enjoyed with its exchange rate - strength versus the greenback and weakness against trading partners - will spur renewed capital outflows, said Goldman Sachs/Gao Hua Securities.

"Various signals sent by the policymakers indicate that there will be no more massive easing," said Bank of Communications analyst Xu Yuehong in Shanghai.

"This is adding pressure to the market, as the pending US interest rate decision continues to be the major external risk that will directly affect the currency, which in turn could bring tightening pressure on onshore liquidity."

A gauge of the greenback's strength is near a 10-week high. Investors are now predicting a 30 per cent chance the Fed will raise interest rates at its next meeting, up from 12 per cent at the start of last month.

The Shanghai Composite fell for a second straight month.

While the gauge climbed 3.3 per cent yesterday after Goldman Sachs Group increased its odds for MSCI inclusion to 70 per cent from a 50 per cent prediction given in April, trading in the measure was otherwise subdued in May, and bearish bets have been increasing.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on June 01, 2016, with the headline 'May a distressing month for China markets'. Print Edition | Subscribe