Markets Jul 08

Chinese stocks extend rally as investors eye earnings

Rest of the east Asia is flat to marginally weaker with the Nikkei and the Australian S&P/ASX 200 slightly down 

Chinese stocks extend rally as investors eye earnings
Police in the city of Albury in New South Wales in southeastern Australia check cars coming from Victoria before the border closed at midnight on Tuesday because of the Covid outbreak that led to a further six-week lockdown in Melbourne, the country's second largest city. Analysts said the lockdown could cost the state A$1 billion a week. Photo: William West/ AFP.

(ATF) Chinese stocks continue to outperform the region as markets eye earnings recovery gaining momentum with expectations consumption will support the rebound trajectory in the second half of the year.

Australia lagged with coronavirus cases on the rise in the state of Victoria which has forced a lockdown being reimposed in Melbourne, the country’s second-biggest city.

Overnight US markets were also weighed by the spurt in infections count with California reporting over 10,000 coronavirus cases – a record rise for a single day. The Dow Jones Industrial Average fell 1.51%, the S&P 500 lost 1.08%, and the Nasdaq Composite dropped 0.86%.

But China extended its rally after showing early signs of an economic rebound and amid expectations corporate earnings will begin to reflect some of that positive data.

'Bull market building'

“A Chinese equity bull market is building with rising volumes amid improved earnings visibility and liquidity, plus regulatory/policy support,” said Morgan Stanley in a report.

“We raise targets for all covered indices and still expect A-shares to outperform,” they said, adding that A-shares are benefiting from strong new fund launches and rising retail investor account openings amid regulatory support and an ongoing market reform push.

Morgan Stanley said the expected marginal weakening trajectory of USD/CNY also supports a preference for A-shares to cushion negative translational effect.

The mainland China stock index CSI 300 is up 0.45% and the Hang Seng index has added 0.5%. The rest of the region is flat to marginally weaker with the Nikkei 225 down 0.19% and the Australian S&P/ASX 200 underperforming and down 0.65%.

“The news of a resurgence of coronavirus cases in various countries is clearly alarming, with the US, Australia, the UK, Spain and Japan all hitting the headlines,” said Jennifer McKeown, Head of Global Economics Service at Capital Economics.

“But as things stand, it seems that Asian economies including China, Korea, Taiwan and Hong Kong are relatively well-placed. Their willingness and ability to isolate those infected has allowed them to contain new cases and should continue to do so.”

Asian credit markets are flat to marginally wider with the Asia IG index unchanged at 80/81 and sovereign CDS wider by 1-2 basis points. But that is not deterring new issues from flowing. Overseas Chinese TownVista LandNonghyup BankHangzhou Finance, and Yankuang Group are in the market with bond offerings.