China traders savor relief rally in stocks, yuan while it lasts

SINGAPORE: China investors can finally turn their focus elsewhere after a highly-anticipated meeting between Presidents Xi Jinping and Donald Trump showed some progress on trade.

Fund managers weren’t expecting much as the two leaders met Saturday at the Group of 20 summit in Japan, with light volume in China’s stocks and currency markets suggesting a lack of strong bets either way. 

Still, an agreement to resume negotiations will be welcomed by investors, with some seeing Trump’s decision to ease restrictions on Huawei Technologies Co. as a positive surprise.

The offshore yuan strengthened 0.5% to 6.8357 per dollar as of 9:01 a.m. local time, while FTSE China A50 Index futures climbed as much as 2.3% in Singapore.

The truce lifted risk assets in Asia on Monday. But skeptics say it will take more than a delay on tariffs to turn around the caution that’s already claimed this year’s bull market in the tech-heavy ChiNext Index. 

A weaker economy remains a key overhang, with investors unclear on whether Beijing’s measures to support growth will be sufficient. Data Sunday showed the outlook for China’s manufacturing sector deteriorated again in June.

"I don’t think that this will completely turn around the China equity market or the depreciation of the yuan,” said Paul Sandhu, head of multi-asset quant solutions and client advisory at BNP Paribas Asset Management. "I see this as just a postponement.”

Even though the Shanghai Composite Index is still among the world’s best benchmarks this year, it has lost 8.9% since its April high and is struggling to hold above the key 3,000-point level. The yuan has weakened about 2.7% against the greenback in a similar period, while government bonds have largely missed out on the huge rally that’s taken off globally.

With the G-20 meeting out of the way, here’s how analysts recommend trading China’s markets in the coming days. Hong Kong’s stock market, the hardest hit by the trade war in May, is shut Monday for a holiday.

Stay Hedged

"Hedges were being bought to cover tail scenario for G-20 -- I would say that positions can be moved further into the third quarter now,” said BNP Paribas’ Sandhu.

He recommends owning shorter-term high grade bonds alongside higher risk or emerging-market debt, or a hedged position in stocks.

Yuan Risks

"The onshore yuan could dip below 6.80, but it’s unlikely to stay there for too long,” said Hao Zhou, senior emerging markets economist at Commerzbank AG. "Fundamentally the yuan is still under depreciation pressure. Certainly the PMI still suggests a challenging outlook.”

Stock Momentum

"This renewed truce should offer support for Chinese equities,” said Jingyi Pan, a market strategist at IG Asia Pte. "A gradual clearance of the outstanding issues from talks will be key to keep the momentum going.”

Fed Focus

"People will price in a positive trade talk outcome in the coming three months, and a possible rate cut by the Fed will lure more capital flow into China,” said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. With the Federal Reserve’s dovish stance, Hong Kong stocks will have "a good quarter.” - Bloomberg