Strategists say two factors are helping to give way to Monday morning’s stock market surge: optimism about China and the view that central banks will support the markets.
A front-page editorial in the state-owned China Securities Journal is getting credit for driving a strong recovery in Chinese markets overnight that spread to global stocks. Shares in Shanghai were up 5.7%, after the publication said investors should expect the “capital markets wealth effect” and the prospect of a “healthy bull market.”
“We have the Fed to boost bull markets, China has its state means,” wrote Peter Boockvar, chief investment strategist at Bleakley Advisory Group.
Individual investors appeared to be playing a role in what appeared to some traders to be a so-called merger on Monday. The CSI 300 index of Shanghai and Shenzhen listed stocks rose nearly 6%, to a 5-year high. Hong Kong shares rose 3.8%.
“There is a fairly long history of policy makers using the media to drive the market. It doesn’t always end very well,” said Mark Williams, chief Asia economist at Capital Economics. “We saw that in 2015, exactly the same statements then. They tried to push the market higher. It worked for a while, and then the market collapsed.”
Williams said investors who entered continental markets clearly received a go-ahead.
“Right now, it’s rational for investors to jump on the market because policymakers are telling them that the market is going to go up and it probably will for a while,” Williams said, adding that it is likely to be unstable.
China’s economy faces many obstacles, including trade problems with the US and mounting friction as economies move to decouple. But in the short term, the prospect of an improvement in China spread to other markets, increasing sentiment for world trade.
“The economy has recovered after the coronavirus,” said Williams. “I think China will do better than most of the world, but the world economy is in bad shape.”
Boockvar said there may be some justification for the gains in the Chinese markets.
“The international stock markets have underperformed the US markets for the past 10 more years,” Boockvar said. “You look at the Shanghai compound and it’s still down over 50% from its 2007 peak. You can talk about individual investors … but maybe it may start catching up.”
Shanghai profit was above a jump of 5.8% last week. Japan’s Nikkei was up 1.8% on Monday, while South Korea’s Kospi was up 1.7%.
“It may be time for Asia, which appears to have controlled the virus better than the United States, to bring its markets up to speed,” Boockvar said.
On Friday, China’s services PMI saw the best jump in a decade. China June Caixin’s services reached 58.4, up from 55 the previous month. Hong Kong’s PMI in June was 49.6 from 43.9 in May.
“Other things are happening in China, too. If they want equity markets to rise, they will. It was fueled by short-term coverage,” said Andrew Brenner of the National Alliance. He said that while watching the action overnight, it seemed to be a panic purchase.
Even with a surge in virus cases, US stocks opened higher, after stock markets around the world increased, with Australia an exception. Germany’s DAX rose 1.6% and the FTSE rose 1.7%. European companies exposed to China, such as cars, were higher.
“I am beginning to believe that the Covid case is an inverse indicator. The worse it gets, the more the market improves because it means more Fed and fiscal stimulus for the markets,” Brenner said.
Boockvar said the market has been ignoring the virus due to the stimulus. “You have to wonder if the Fed was even ashamed that the stock market is at a record level and that the economy is doing what it is doing,” he said.
As for the China market, BOCOM International’s Hao Hong told CNBC that Shanghai broke a key long-term moving average of 850 days.
“The market continues to believe that the central bank will relax more, as seen in China’s recent credit and monetary expansion,” Hong said. But he added: “In China, the bull arrives as fast as it leaves.
– CNBC’s Eustance Huang contributed to this story.
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