China shares rebound: It’s deja vu all over again

You know it’s going to be a good week when Monday opens with a nearly 5% rebound on the Chinese stock market, regaining most of last week’s losses.

We realize gloating is in such bad taste.

Still, Asia Unhedged would like to point out that we weren’t just saying that the market is going to bounce back. We also see that we’re in an environment of extreme volatility, and that you need to brace yourself for a roller-coaster ride.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen surged 4.9%  on Monday, its biggest single-day gain in two and a half years, to 5,076.18.

The Shanghai Composite Index posted its biggest rise in more than four months, jumping 4.7% to 4,828.74 points. Hong Kong shares advanced a smaller amount as they reacted to disappointing U.S. economic and market data from Friday.

Last Thursday, the mainland indexes fell nearly 7% after brokers tightened their margin requirements and the government pulled some liquidity out of the money market.

With a weekend to evaluate their options, Chinese investors have obviously decided this was a buying opportunity and not the beginning of the end. A weekend of news reports that saying the foundations of the bull market remain in place, and that the government wants a “healthy” market might have led people to a more positive view.

Still the best news came Monday morning when the official manufacturing Purchasing Managers’ Index (PMI) showed China’s factory sector grew enough in May to hit a six-month high. On the flip side, demand for exports is declining.

Meanwhile, another survey shows that the services sector had slowed to its lowest rate in more than five years. This gave investors wanting more stimulus from the government more ammunition for their argument, said Reuters.

“The PMI figures, both the official one and the HSBC one, were very close to the consensus view and they can be interpreted as a further normalization in the economy,” Gerry Alfonso, director of Shenwan Hongyuan Securities Co, wrote in a note.

While this wasn’t nothing, it typically wasn’t enough to spark such a huge rebound. So, we repeat be ready for more volatility. Bull market corrections and bear market rally’s can reverse fast enough to give you whiplash.



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