Chinese stocks continued their recent rally but derivatives markets showed some caution.
CHINA 50 – Daily Chart
The next target for the CHINA 50 is the 16,000 level. Some resistance emerged at 15,000 and that is the obstacle for the week ahead.
The market has rebounded strongly from lows in April, and implied volatility for coming moves was at its lowest monthly average in four years. But compared with actual swings, it continues to remain high. That shows derivatives are expensive, and investors may be more reluctant to buy upside calls, according to BNP Paribas SA strategists Jason Lui and Scarlett Liu.
Mainland stocks were among the world’s best performers in August due to cash-rich investors who continued to get access. However, data showed the economy remains weak, with concerns over the sustainability of recent gains.
“It seems likely that many traders took significant positions in July, paying higher implied vols expecting higher volatility, to trade or hedge the outcomes of the August US tariff deadline,” said Han Piow Liew at Maitri Asset Management in Singapore. “Once the deadlines passed without marked aggravation to the tariff situation, these positions were likely closed out at lower implied vols, with lower volatility expectations going forward”.
In the U.S., investors have become more bullish on exchange-traded funds tracking the Chinese share market. The premium for bullish three-month options over bearish is now back at levels seen ahead of the tariff selloff into April, with funds like the iShares China Large-Cap ETF and KraneShares CSI Internet Fund being popular.
Bank of America Corp analysts noted that they have “rarely” seen downside hedges for the FTSE China A50 Index this cheap.
Traders are taking positions around the end of the 90-day trade window between the U.S. and China. One bullish investor recently sold $40 call options expiring at the end of September, equivalent to 10 million shares of the large cap ETF.
Some negative market news on Sunday showed China’s home sales extended their slump in August despite additional stimulus measures.
The value of new home sales stood at 207 billion yuan ($29 billion), according to preliminary data from China Real Estate Information Corp. That marked a 17.6% drop from a year earlier, and a 24% slump in July. Sales have now dropped for six straight months.
