Shanghai Composite drops 1.4% overnight
The Shanghai Composite dropped 1.4% overnight as the Chinese economy ( FXI , quote ) digested news that the country may consider tightening monetary policy in order to stem inflation and economic news from overseas disappointed.
The Chinese indices in Shenzhen, Shanghai, and Hong Kong ( EWH , quote ) all got off to a slow start Monday morning after poor equity performance around the world hindered Chinese stocks. With the Dow down more than 200 points on Monday, it's of little surprise that Chinese markets were adversely affected.
While the initial drop can be blamed on a change in global sentiment towards the economy, the steep drop in afternoon trading in Shanghai was very much China-specific as news leaked from a state-owned newspaper that authorities in Beijing might start to tighten monetary conditions.
A move away from recent loose conditions could negatively impact Chinese banking stocks, institutions whose performance is correlated to liquidity conditions . As well, Chinese housing developers slipped given their exposure to credit conditions.
The combination of these factors drove the Shanghai Composite down to its lowest levels in more than a month. Current levels are technically important for the exchange; this most recent drop has seen the Shanghai Composite move back towards its 50-day moving average.
The Shanghai Composite has remained above the 50-day moving average since it began its huge run higher in mid-December; a breach of the 50-day moving average could see a technical breakdown in the Shanghai Composite and a concomitant drop towards the 100 and 200-day averages.
After PMI came in somewhat disappointing last week , the Chinese economy needs some good news to see the rally in the Shanghai Composite continue. This could potentially come from the housing market; while developers may be hindered by new credit conditions, given the importance of housing to Chinese GDP, if the secondhand market remains strong, positive sentiment could pervade the Chinese economy as a whole.