Shanghai stock market suffers biggest daily drop in six months

Shanghai and Shenzhen shares tumbled on Monday, dragging other Asian equity markets such as Hong Kong and Singapore lower. The Shanghai Composite lost nearly 2.5%, the Shenzhen Composite lost 4.86% and the ChiNext index tumbled 5.5%. This is the biggest daily drop recorded in nearly six months. 

There are several reasons behind this drastic selling. First is the Fed’s rate-hike decision, which will be announced on Thursday morning. Although markets seem to have already priced in a rate hike, investors tend to take fewer risks ahead of such major events, causing temporary risk-off sentiment in the markets in China and Hong Kong. 

Secondly, China’s insurance regulator (CIRC) has banned insurer Evergrande Life from further investing in the A-share market. This announcement came after CIRC sent inspection teams to several insurance companies last week. This is a warning sign to insurance companies who have been active in the open market, acquiring shares in companies like China Vanke. Tightening regulatory requirements also weighs on market sentiment.

Last but not least, recent comments from US President-elect Donald Trump on the 'one China' principle also worried investors somewhat, although we don’t see any material impact from that yet.  

Investors’ confidence may get hurt in the short term, and thus risk-off sentiment may continue until Thursday’s Fed decision. 

Oil prices retrace as market awaits OPEC’s actions 

Separately, crude oil prices retraced from recent highs last night, forming a 'pin bar' in the daily chart. The WTI December contract fell to its key support level of $52.3 (100% Fibonacci extension level). Now the concern is whether OPEC and non-OPEC members will honour their word to cut production and start to take action over the next few months. 

Technically, WTI broke out from strong resistance levels at $52.3 (100% Fibonacci extension level) and traded higher at around $53.8 yesterday. $52.3 will become its immediate support level. The next resistance level can be found at around the $56.0 area.

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