The sharp recovery in Chinese stocks may have paved the way for the Dow's comeback this week. The Dow rebounded 5.1% on Monday.
China’s A-shares market – domestic stocks that are traded in the Shanghai and Shenzhen stock exchanges – just saw its biggest bull trend in three years. The abrupt recovery of the Chinese stock market increases the likelihood of a strong Dow Jones Industrial Average comeback in the near-term.
The rebound of the A-shares market led the SSE Composite Index to rise by 3.15% on the day, nearly recouping all of last week’s losses.
China-based analyst Jiang Xin says:
The China A-share market experience the strongest bull trend since 2015. Despite the global economic recession and the coronavirus epidemic, many A-share stocks reached their ATH. Analysts believe the stimulating fiscal policy ignited the bull market.
According to financial analyst Josh Jordan, the U.S. stock market officially entered a correction in the midst of a global coronavirus outbreak last week.
Investors started to frantically panic sell both risk-on and risk-off assets, as concerns about a coronavirus epidemic breaking out in the U.S. intensified.
Jordan said the following in a tweet:
Today marks the biggest single day point drop for the Dow Jones in history at 1,195 points. That said, it’s far from the biggest percentage drop in a day. And the US stock market is now officially in a correction in the middle of an unfolding crisis. What a crazy week.
The majority of selling pressure on the Dow and broader U.S. stock market came from institutions.
As CCN.com previously reported, the Dow Jones saw “historic levels of selling” primarily driven by institutional algorithms.
The introduction of various stimulus packages by the Federal Reserve, such as a benchmark interest rate cut, could increase investors’ appetite, especially after such a large pullback.
In China, investors are reacting to the government’s increase in fiscal spending, which is easing pressure on the local stock market. The effectiveness of additional stimuli released by the government in boosting share markets is pretty straight forward, according to high-profile investor Li Changmin.
With the Fed hinting at a lower interest rate heading into the third quarter of 2020, major banks foresee the Fed cutting at least 100 basis points by the year’s end.
A near-zero federal funds rate could be the catalyst investors are seeking to target a Dow Jones recovery.
The Dow Jones rebounded over 5% on Monday, as the stock markets of China, South Korea and Japan recovered after a steep sell-off.
The Dow’s immediate roadblock is concern about a potential coronavirus outbreak in the United States.
One individual in the U.S. was diagnosed with coronavirus without any clear connection to a COVID-19 patient or traveling to China.
If U.S. investors increasingly sees certainty regarding the coronavirus outbreak in the upcoming days, the supportive attitude of the Federal Reserve and central banks across Europe and Asia could provide a catalyst for a broader market recovery.