Wednesday 16 September 2015

Samurai Summary: Top Tweets 16/09/2015

If there was one word that could possibly describe what it feels like being involved in markets that exhibit high levels of volatility it would have to be chaos. China has been a great example of such markets with volatility exceeding new levels that were last seen in 2008.

Seen on the tweet below from Jeroen Blokland, it is evident that there's been an uptick in Chinese equity volatility in a big way. What you'll also notice is levels of extremes where the market reaches a point of over exaggeration and volatility tapers off again with the current period residing in the latter. However viewing the overall chart instead of a specific area you also see the uptick.

 In saying this it was no surprise that Chinese equities reacted the way they did this morning when it was reported that MSCI CEO Henry Fernandez said that Chinese A listed shares could be included in the indexes faster than expected with volatility playing no part in the decision.

I think this is quite a bold statement to make given the increase in a risk of collapse recently in Chinese stocks only to be rescued by government's plan to artificially support it from dropping.

 Strange that the last few days Chinese markets have been off the boil by a bit up until today with a remarkable surge of 5% in just the last hour!!! I think one really needs to start questioning the measure of the moves when it comes to Chinese stocks these days because there's a false belief that a market dropping 6% in two days only to rally 5% the next day is a sign of bullishness which is far from the truth.
How do we ascertain who's moving this market? By simply looking at the level of margin debt of traders account over the last while. It peaked in June and has since declined to the lowest levels since December last year. What can we interpret from this picture? Retail traders aren't shifting the market up and down, they slowly exiting and waiting on the sidelines while the government funds it.

Knowing the government is supporting the market with money allows for the question of what happens when those funds become exhausted? We've recently seen the effects of a Chinese selloff of US Treasuries had on global markets with much speculation that government is funding its stimulant from foreign investments made over the past decades.

This is concerning as a matter of wealth depletion at the cost of saving a transitional stock market still being artificially inflated for the purpose of saving political face.

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