China's Bullish Start to the Year Faces a Big Test After Holiday
(Bloomberg) -- The bullish mood that was starting to build in China will be tested when markets reopen Monday as concern over the U.S. trade relationship resurfaces.
For clues on how investors may react, look to Hong Kong, where Chinese equities just had their first back-to-back loss of the year and the offshore yuan fell against the dollar over the week. A drop in a U.S. fund tracking A shares also indicates caution could spread onshore after the five-day break, while the greenback’s run of gains is likely to weigh on China’s currency.
The CSI 300 Index rose 7.9 percent this year through Feb. 1, reversing its December losses as investors took comfort from Beijing’s measures to support the slowing economy and risk assets gaining favor around the world. But trade clouds could now persist into March after Donald Trump said he won’t meet Xi Jinping before the imposition of new U.S. tariffs on Chinese goods.
“Worst case, the talks could break down,” Bank of America Corp. strategists including David Hauner wrote in a Feb. 7 note. “More likely, the deal could be too vague to be credible, or the Feb. 28 deadline could be postponed, extending the uncertainty. February brings several potential bumps for the EM and global risk rally.”
Where the People’s Bank of China decides to fix the yuan will also be in focus Monday. The central bank may allow it to weaken in line with the offshore rate, or it could opt for a stronger fixing to signal support for the currency. Traders sold the offshore yuan last week as the dollar advanced, after a January rally took it close to the 6.7 level not seen since July.
Technical indicators suggest the coming weeks will be pivotal for China’s equity market after it recovered almost $380 billion this year. A gauge of momentum on the CSI 300 climbed to the highest level in a year before the Lunar New Year holiday, while the Shanghai Composite Index finally closed above its 100-day moving average for the first time since last February. In Hong Kong, the Hang Seng Index is just points away from the 28,000 key level.
As declines go, Hong Kong’s was relatively muted Friday. The Hang Seng China Enterprises Index closed down 0.7 percent, paring an earlier loss of 2.2 percent, while the yuan was little changed as traders speculated that Trump could extend the deadline for negotiations with China if progress is being made. The leaders may also speak by phone.
The U.S. president told reporters Thursday that the two would “maybe” meet later.
“The most likely scenario in our view is an extension of the deadline while talks continue,” said Allan von Mehren, chief analyst and China economist at Danske Bank A/S. “We should probably prepare for volatility in markets as we move closer to the time when a deal is set to be closed.”
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