Global equities higher, Australian equities catch a cold from Shanghai, gold and silver robust, ASX futures down 5 points

There's a saying that goes, "When the US sneezes, the world catches a cold." However while US equity performance of late has been solid, the ASX 200 has registered poor performance to start the week, following our day session yesterday when investors squandered the 76-point lead that we began the week with to finish just 10 points higher for the day. So who is sneezing?

In today's first chart you can see the recent price action in one of the more accurate ETFs that tracks moves in Chinese A-shares via physical holdings rather than derivatives, the Deutsche Bank X-trackers Harvest CSI 300 China ETF (ASHR). Of all the Chinese share trackers available on the Rivkin Trader platform (there are many, click here to get instant access to a free $100k demo account and type in 'China ETF'), this one is probably my pick for those wishing to play this market. You can see that this tracker has risen significantly in the past few months, mimicking moves in the underlying Shanghai Stock Exchange Composite Index. The bad news is that, despite a 7.70% fall yesterday, traders have barely broken the back of the exuberant ~70% rally that has took place during the second half of 2014. So could there be more to come? Quite possibly. Is Australia going to be affected? Absolutely - we experience the unfortunate reality of picking up leftovers from either the US or Asian markets, whichever is worse!

This massive rise has been brought about by a lot of unchecked punting, in the form of growth in the leveraged equity trading space in China. Outstanding margin loans supporting Chinese shares stood at 767 billion yuan on Friday, up from 444 billion yuan at the end of October. That 72% rise in leveraged equity trading spooked regulators, who have banned China's largest brokers from opening new margin accounts for the next three months. There are two views to take here:

  1. The ban on growth in new margin lending accounts will create a plateau effect in Chinese equities and the index may tread water (subject to fundamental influences on stock prices)
  2. The leverage-fuelled 2014 growth, and the commensurate price to earnings ratio growth in the index is unwarranted, and plenty more selling could occur
Before getting too bearish and shorting the ASHR or getting bearings ASX stocks in the short-term, however, one should consider where this Shanghai index came from. Chinese regulators, likely concerned by a ~9 times PE ratio for the index in September last year, decided to invite foreign investors to purchase physical A-share stock from October 2014 onwards, subject to maximum annual quotas, in order to encourage higher prices. Why? Because their stock market had essentially gone down and then sideways ever since the apex of the 2008 market crash, and 2014 was the first year where the trend was bucked - the biggest move (no surprise) came from October 2014 onwards. Today's second chart, a weekly snapshot of the smaller PEK ETF, due to its longer price history, shows some of the lost years of performance that Chinese regulators have successfully ignited, but they're probably thinking they've fuelled their market enough for now.

Today's last chart shows something very familiar to Australian investors - the ASX 200's under performance of the US S&P 500! Yes no big surprises here, but it does illustrate that while the S&P 500 (black line) is flat from 1 November 2014--a point where our performance really began to decouple from that of the US--until now, the ASX 200 is down 5%.

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

Upcoming economic announcements: Chinese GDP & retail sales out at 1pm, Germany's economic sentiment survey out at 9pm, all Sydney time.

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