Overall sentiment surrounding Chinese equity markets held firm on Tuesday with hopes for investor support, but expectations of flows into Hong Kong deterred support for the Shenzhen index.
US equity markets were subjected to a bout of profit taking on Monday following gains late last week and there was a more defensive overall tone surrounding equities. There was further volatility surrounding oil prices, which also tended to unsettle equity markets.
The yuan was fixed stronger on Tuesday, primarily reflecting a wider dollar correction weaker. There were still underlying concerns surrounding the risks of currency instability over the medium term, especially if there is evidence of sustained capital outflows.
There was further speculation that a further clampdown on property lending by both the central bank and individual cities was having a significant impact in diverting capital flows towards equity markets and away from property, which could provide underlying market support.
The opening of the Shenzhen-Hong Kong Connect on December 5th will continue to have a significant impact. Although there was underlying net optimism surrounding the launch, there were also some concerns that capital flows would flow away from the domestic market into Hong Kong, which would tend to undermine the local market.
In this context, the Shenzhen index did underperform the Shanghai index on Tuesday with the latter hitting the highest level for 11 months.
After opening slightly higher and edging into positive territory in to the session break, there was a significantly weaker tone following the break with the index quickly sliding into negative territory.
At the close, there was a decline of 16.46 points and 0.77% at 2,110.36.
Energy prices will continue to be monitored closely in the short term and there will be some caution ahead of the domestic PMI data due on Thursday.