Following the much-celebrated (and massive 13% swing low-to-high) bounce yesterday at the hands of a desperate PBOC, the morning session ended with an early boost fading. Shanghai margin debt has now suffered the longest streak of declines in 3 years and as BofAML warned they "doubt that this marks the end of the de-leveraging process in the stock market given that much of the leveraged positions are yet to unwind."
With both Manufacturing and Services PMIs printing above 50, stimulus is now clearly aimed at maintaining the bubble but as BofAML concludes, "after this adverse experience, we expect many investors will be much more cautious before investing into the stock market, we will be surprised to see a return of the unbridled enthusiasm of investors any time soon."
- SHANGHAI MARGIN DEBT HAS LONGEST STRETCH OF DECLINES IN 3 YEAR
Not the follow through everyone was hoping and praying for after Greece defaulted...
We doubt that this marks the end of the de-leveraging process in the stock market given that much of the leveraged positions are yet to unwind. We believe that the chance is high that we have seen the peak of this round of the rally in the A-share market.
We suspect that the government will be less blatant in urging investors to buy stocks going forward after seeing the potential damage that a leverage-fueled market can do.
After this adverse experience, we expect many investors will be much more cautious before investing into the stock market, using leverage.
The air had probably been let out of the balloon and we will be surprised to see a return of the unbridled enthusiasm of investors any time soon.
In our view, the selling pressure so far has mainly come from stock-related borrowings via various unofficial channels where the leverage is much higher. Besides, sentiment also plays a decisive role - if many leveraged buyers believe that the bull market is over, they may be inclined to sell due to the high interest cost burden.
Overall, we don't think that the deleveraging process in the stock market has run its course and the market may stay volatile in coming weeks.
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Longer term, the psychological damage from the two-week long sharp market decline may linger for a while. This means that any market rebound will unlikely be strong in our view.