What Goes Up Must Come Down

Daily Analysis - 28/05/2015

Spectacular Rally in Chinese Equities Leads to Rapid Reversal Downwards


Chinese traders are in a panic as the swift sell-off in the regional equities ends nearly a week of steady momentum higher. The acceleration of retail brokerage account openings underscores the risks as more novice investors enter one of the best performing global equity markets.

Chinese Stocks Plunging

The major news of the morning has been the plunge in Chinese equities as shares retreat from recent exuberance in a sharp correction lower. The Shanghai Composite has tumbled as much as 6.50% during the session with brokerage shares bearing the brunt of the losses as the Hong Kong Hang Seng trades down approximately 2.50%. After nearly a week of shares rallying skyward on the backs of increased retail flow trading, today’s major pullback highlights the inherent dangers of excessive valuations evident across Chinese stocks and initial public offerings. The modest reconnect with reality today highlights the downside of momentum as panic selling amongst novice retail traders sparks a selloff. Price-to-earnings multiples have hit levels that traditionally signal overvaluation that should signal caution ahead. The Hong Kong dollar is steady after yesterday’s sharp downtick before erasing all losses.


Greek Deposit Outflow Hits New Heights

Conflicting reports out of Brussels show that the distance between Greece and creditors remains as wide as ever. Optimistic comments from Greek officials were quickly squashed by German and Eurogroup leaders as Greece desperately seeks an accord to stave off default. Progress remains elusive with JPMorgan stating that the longer the situation goes unresolved the more likely the chance of a Greek exit despite expectations from the bank’s analysts of a grand compromise. Greek citizens are unimpressed by the latest charade as evidenced by the accelerating bank deposit outflows with an estimated EUR 300 million pulled from Greek banks on Tuesday. As negotiations come down to the wire, periphery European sovereign debt will likely continue to decline as equities push higher on quantitative easing, led by the 1.95% rally in the CAC 40.


Kuroda Sees no Bubble

Just as the benchmark Nasdaq Composite hits new record highs helped by late session bidding, concerns of overvaluation in equities is circling the globe. Bank of Japan Governor Kuroda in comments overnight remarked that he “doesn’t see any asset bubble or stock market bubble.” The Bank of Japan is partly responsible for the latest rally in equity valuations as the Central Bank buys more equities as the bond market runs thin of available sovereign debt for the BoJ to monetize. This comes as the Nikkei 225 trades just shy of all-time highs reached earlier in the session. Some investors are growing wary as institutional money exits after the index reached its latest highs just on the heels of the Yen reaching its weakest level in 13-years versus the US dollar. USDJPY is currently trending 0.09% higher on the session after retreating from earlier gains.


USDCAD Equidistant Channel Technical Pattern

The move by the Bank of Canada to leave the benchmark interest rate on hold at 0.75% was initially greeted with optimism in the USDCAD pair which was benefiting from momentum higher in the dollar before the pair retreated overnight in-line with developments broadly affecting the US dollar. With the Federal Reserve telegraphing higher interest rates to financial markets, the pullback in the dollar looks to be temporary with the longer-term trend higher remaining intact. The equidistant channel setting up in USDCAD has a bullish bias, rounding off nearly a week of gains in the pair as the dollar correction lower abates. Ideal positions are taken from the lower channel line to be closed at the upper channel line. Fighting the near-term uptrend is unwise considering the worsening reward characteristics as risks grow.


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