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 align="alignright" 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.