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China Equities Remain Subdued Despite Sharp Rebound in US/Euro Stocks

CHINA
  • While equities have been recovering sharply in the US and the Euro area, with the SP500 and Eurostoxx50 up 17% and 12% respectively in the past month, China stocks have remained subdued amid falling growth expectations.
  • The Hang Seng index is down over 10% since its June local high and is now the worst performing equity market since the start of the year (down 17%).
  • The chart below shows that the dynamics in the Chinese equity market have been independent from the risk on / risk off environments observed in the European and US markets.
  • In addition, the rebound in liquidity this year (China TSF) combined with the 10bps cut in the policy rate this week have not been enough to support domestic risky assets, which continue to remain vulnerable in the near term.

  • We have seen that counter-cyclical policies in China combined with country specific risks have led to several divergence between China and Euro/US equity markets in the past cycle.
  • The chart below shows the 6M correlation between Euro/US, China/US and China/Euro equity markets since January 2010.
  • While the correlation between US and European markets have remained strong most of the time (averaging 80% and above 60% most of time), we can notice it has fallen considerably below 50% for US/China and Euro/China several times, and is currently standing at around 20%+.

Source: Bloomberg/MNI

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