The Shanghai Composite (
FXI
,
quote
) dropped 1.68% in the week's first trading session as investors
digested disappointing news from Europe and China itself.
[caption id="attachment_56487" align="alignright" width="300"
caption="JP Morgan thinks Chinese banks like ICBC are a good short
here"]
[/caption]
Markets worldwide dropped on the back of the European Central
Bank's decision over the weekend to bailout Cyprus; while bailouts
are often met with market optimism, the terms of the Cypriot one
are not only onerous on the retail segment, but these initiatives -
which asks depositors in Cypriot banks to take a haircut --
set a precedent
that could undermine public faith in the banking system.
While this news pressured Asian markets in the morning - the
Nikkei (
EWJ
,
quote
) was down 2.71% , while the Hang Seng (
EWH
,
quote
) fell 2.0% on high volume - additional concerns pertaining
to the Chinese arose, pushing the Shanghai Composite close to
correction territory.
Chinese markets continued to react poorly to proposals by the
new administration in Beijing designed to rein in the country's
housing market. The addition of property taxes and higher standards
for mortgage applications for second homes have pressured real
estate developers.
While cooling the housing market is imperative in ensuring the
long-term stability of the Chinese economy, developers in Hong Kong
dropped as a result. Zeng Xianzhao of China Securities
Information
recommends avoiding property developers
with exposure to segments of the housing market that will be
adversely affected by new policies.
As well, the Shanghai Composite suffered another blow after JP
Morgan
downgraded the four major Chinese banks
to a sell rating. The American bank advocated purchasing puts or
selling the banks short, as the firm thinks that banks like ICBC
will struggle as a result of slowing economic growth and
inflationary pressure.
Because of the Chinese New Year holiday last month, it's
somewhat difficult to accurately gauge the current state of the
Chinese economy; unfortunately, because of a lack of major data
releases in the near future, it would appear as if it will be some
time before a potential positive catalyst for the Shanghai
Composite.
As a result, traders should look for the Shanghai Composite to
continue its downward trend over the short-term as the country
grapples with the abovementioned economic constraints.
