YINN Night Market Sudden Change

The performance of the A50 is indeed surprising!

Yesterday, at the end of trading, the A50 futures rose over 4%, and in the night session, it further increased by nearly 1%. However, after the market opened today, the index experienced a rapid decline, with a drop of 3.5%, almost erasing yesterday's significant rebound.

What exactly happened behind this strong volatility? Analysts believe that, on one hand, it may be related to the external environment; during the Asian session today, major global stock index futures fell sharply. The market expects that the Federal Reserve may cut interest rates next week, but is leaning towards a more hawkish stance on interest rate outlook; on the other hand, due to the timing being close to Christmas, foreign investors may not have a strong willingness to go long. Domestically, it is also the year-end settlement phase, so the market may lean towards caution. The decline of the A50 is somewhat unexpected, but the market is still worth looking forward to.

The Surprise of A50

Yesterday, the Hong Kong benchmark Hang Seng Index rose about 3%. Other Chinese listed exchanges and companies also saw increases. The Chinese benchmark CSI 300 rose over 1% on Monday. Similarly, the stock prices of Chinese e-commerce giants such as Alibaba (BABA), Pinduoduo (PDD), and JD (JD) all rose by at least 9%. The stock price of Chinese electric vehicle manufacturer XPeng also saw a double-digit increase, rising nearly 14%.

In this context, the entire market should not have shown downward fluctuations, but today the A50 provided such guidance. After the A50 index plunged in the morning session, it continued to decline, with an afternoon drop exceeding 3.5%, dragging down both A-shares and Hong Kong stocks.

So, why is the market so weak?

First, it may be related to interest rates. Macquarie analysts pointed out in a report on Monday that the Federal Reserve may cut interest rates next week, but multiple indicators show that the job market remains strong, and the trend of declining inflation is slowing, which will force the Fed to lean towards a more hawkish stance on interest rate outlook. Last night, U.S. stocks fell across the board, and today, major market futures also mostly weakened.

Secondly, due to the timing being close to Christmas, foreign investors may not have a strong willingness to go long. Domestically, it is also the year-end settlement phase, so the market may lean towards caution. Today, the One ETF Southern China A-Share CSI 500 in the Japanese market also did not perform strongly.

How do foreign investors view this?Goldman Sachs' chief China economist wrote in a report to clients on Monday: "Relative to the low market expectations before the meeting, we believe the meeting results are an upside surprise, as the easing rhetoric is stronger." He added that the team expects China to announce "more specific demand-side stimulus measures" early next year.

Wall Street observers noted that the latest comments from China are an encouraging sign that more relief measures are on the way. Burns McKinney, senior portfolio manager at NFJ Investment Group, said on Monday: "China has introduced monetary stimulus on top of the fiscal stimulus measures announced months ago, which is a positive aspect. This indeed indicates that China's policymakers are seeing the problems."

McKinney stated that the Chinese stock market may still face "significant volatility" in the short term, "especially in the case of increased tariffs." "But for patient and long-term investors, valuations in China are indeed favorable to you," he said. "In terms of some technology companies being impacted by regulatory shocks, there are indeed many headwinds turning into tailwinds, and we are now starting to see the tailwinds from fiscal and monetary policy."

Economists say that a comprehensive recovery depends on the scale and execution of future fiscal policies.

Goldman Sachs stated that the implementation of policies remains key to the effectiveness of stimulus measures. "Today's (Monday's) meeting further confirms our view that fiscal easing will play an important role in stabilizing economic growth, but the composition of this easing may differ significantly from past cycles, focusing more on consumption, high-tech manufacturing, and risk control, rather than traditional infrastructure and real estate investment."

JP Morgan believes that while investors do not expect the upcoming Central Economic Work Conference to announce specific figures (the norm is to wait until the March Two Sessions), the strong wording has boosted market sentiment, which has been low since hopes for stimulus weakened a month ago. A considerable number of investors now expect a fiscal deficit of 4% for 2025, up from previous expectations of 3.5%-4%. Perhaps only the strong can move forward in difficult times. In any case, this should help boost sentiment and create a squeeze in the short term, but from a slightly longer-term perspective, we still need to wait for Trump to take office and observe subsequent developments. This is also feedback they have received from many global investors.

Source: Securities China