Notes From Hong Kong: The Summer Rally Is On

L.Desjardins submits: The Chinese and Hong Kong indices are likely to consolidate in the coming weeks ahead of the December CPI figures on January 20 and the Lunar New Year holidays at the end of the month. Trading last week was tinted with more optimism that the Chinese economy will do well in the first half despite further credit tightening by the PBOC.

L.Desjardins submits: Early this week, Hong Kong should give us a good indicator of the performance of the Shanghai market when it reopens on Wednesday and possibly for the coming weeks. The Lunar New Year rally of the past ten days has been largely fueled by higher commodities prices. Oil price weakened on Friday and further weaknesses this week will reflect on the performance of the stocks that were leading the Shanghai and Hong Kong markets last week.

L.Desjardins submits: While volume remained low, the Shanghai and Hong Kong markets traded within a 3% range. The lower close on Friday is largely due to tension on the Korean Peninsula and the fact that many traders did not want to maintain large positions over the week end. Beijing will release its November PMI data on Tuesday and the markets will remain edgy and volatile, particularly the energy and materials sectors.

L.Desjardins submits: Some consolidation is expected for the Hang Seng Index but momentum may take the index clearly above the 23000 level this week if New York performs well. The momentum this week may come from China. In Shanghai the uptrend may persist ahead of the Communist Party annual meeting from October 15 to 18.

L.Desjardins submits: While there was a relief rally in Shanghai as the PBOC stayed put, the mood in Hong Kong is rather subdued with volumes lower than average. Not much is expected during the next two weeks; there will be the usual window dressing and profit taking. We may have a rally in early January but trading in the coming months will be done under the fear of further tightening by the PBOC, a new European crisis and lackluster economic news from the U.S.

L.Desjardins submits: With Hong Kong at a 2.5 years high and Shanghai on a tear, economic news from Beijing will dominate the market this week. On Monday investors will try to figure out if there any thing new from the Chinese Communist Party discussion over the next 5-year plan following its annual meeting on the week end. Also on the mind of many may be the outcome of the G20 Finance ministers on Thursday although not much is expected.

L.Desjardins submits: A batch of economic data released Friday and Saturday in Beijing reinforces the views that the Chinese economy while slowing remains robust. A renewed confidence should push the Shanghai Composite Index above the 2700 level, a resistance level held since May. Bullishness will be tampered by expectations of rising interest rates.

L.Desjardins submits: The new tightening of the credit screw over the weekend came after market hours on Friday, with the announcement of new bank reserve requirements [in China], the fifth this year. But figures released Saturday assure that we are only at the beginning of the tightening phase.