Stocks in China and Hong Kong suffered a second day of severe declines due to growing concerns about tighter regulations. The Chinese authorities have imposed tougher rules on technology companies and now there are worries the food sector will come under tougher scrutiny. Traders are turning their back on stocks in mainland China and Hong Kong for fear that other sectors could come under more scrutiny by regulators. The tide is clearly turning with respect to regulation and that has caused international investors to cut and run. The declines seen in Asia overnight have influenced markets in Europe and the US.
The tighter regulations comes at a time when China’s rebound is showing signs of fading. Earlier this month, the People’s Bank of China lowered the reserve requirement ratio in a bid to give the rebound another shot in the arm, so there is a possibility that more rigid rules for business could put extra pressure on the economy. From investors point of view, capital tends to flow away from regions where the authorities are clamping down on enterprises, hence why the Hang Seng dropped to its lowest mark since November 2020. The pain isn’t just being felt in the Far East, Chinese stocks that are listed in the US, such as Tencent and Alibaba, are down 4% and 8% respectively.
This week is an important week for corporate earnings in the UK and the US. Last night, Tesla delivered an impressive set of second quarter numbers. EPS and revenue were $1.45 and $11.96 billion respectively, both topped forecasts. Net income in the three-month period exceeded $1 billion – a record. Auto sales accounted for most of the revenue stream and the group is clearly improving efficiencies as net margin on vehicle sales ticked up to 28.4% - its highest mark in over in over one year. Despite the impressive results, the stock is a touch lower today, it could be a sign of weak sentiment, as the share price is down on the day even though the fundamental news is positive.
The AUD/USD is lower even though the US dollar index has now handed back its earlier gains. The Australian dollar falls into the category of a ‘commodity currency’ as the country is mineral rich. Metals like, copper, platinum and palladium are showing losses, and that has weighed on the Aussie dollar. The pound is gaining ground versus most currencies, helped in part because of the UK’s retail data. The UK CBI realised sales report for July was 23, beating the 21 that forecast, this underlines the resilience in the sector. There is a growing sense the UK government might not reintroduce tighter restrictions even though Covid-19 cases have been high lately, that is underpinning the strength in the pound too.