Continued tightening concerns and diminishing sentiment weighed on Asian stocks overnight. The Nikkei finished lower by 1.8%, Hong Kong closed lower by 2.4% and Shanghai closed lower by 2.4%. Trading Shanghai was thin, but investors are growing increasingly concerned that the market has moved too far too fast and that banks will begin to pull liquidity from the market. Breadth was very negative in Shanghai’s A shares with 852 declining issues vs just 56 rising issues. Analysts in Shanghai fear the negative trend might not be over. Wu Nan, an analyst at Xiangcai Securities in Shanghai expressed his concerns:
“Concern over monetary tightening hurt sentiment, with market liquidity drying up. The index is heading for the next round mark at 3,000 points, although there will be a mild rebound at some point. Few investors are brave enough to buy, with the index below its 125-day moving average for a third session in a row.”
Futures in the U.S. are not responding too negatively to the news, however, as we’ve mentioned before – the loss of China in the global economy would almost certainly result in a very dangerous equity market environment. Investors would be wise not to ignore the Chinese market which has actually served as a powerful leading indicator of U.S. equity market performance over the last few years.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.