First Up

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China’s stock market went into its “Year of the Dragon” celebrations with a rare and much-needed bounce, with the index, ahead of last week’s break, up +8.3% from its 5-year low. However, it would be easy for the bears to justify the gains on simple book-squaring ahead of the long break. Still, at MM, we can see something more meaningful brewing beneath the surface, i.e. Chinese stocks are looking for a low after almost halving over the last two years. While there are no concrete fundamental or technical buy signals in place, we continue to believe a ~20% bounce, at the very least, is close at hand.

• Over recent months, Xi Jinping et al. have made it abundantly clear they intend to turn around their economy & stock market with ongoing targeted stimulus, i.e. MM sees major risks brewing in the crowded anti-China trade.

As the region returns to normal after the NY, their market looks set to open strongly this week after solid travel and tourism data, which is likely to bring some relief to one of the world’s worst-performing equity markets. With the mainland market shut between 9-16^th February, Chinese shares listed offshore are likely to give traders their initial cue this week, and the Nasdaq Golden Dragon China index advance of +4.3% last week suggests it will be a bullish start to the week. A pick-up in consumption won’t cure the deflation and property crisis, but there is a lot of bad news built into stock prices and very little good news, leaving room for surprises on the upside.

• The current bounce may become yet another false dawn, but we believe the index is “looking for a low”, and the risk/reward favours buying dips.

We’ve touched on Chia again this morning because there was a strong turnaround by the highly correlated ASX Resources Sector in the second half of last week, with more set to come this morning, e.g. BHP Group (BHP) closed up 60c in the US on Friday night even when US stocks retreated, led by Tech with the NASDAQ down -0.9%.