China Rally Is Fueled by Funds Short Covering, Nomura Says

(Bloomberg) --

Macro hedge funds and quantitative investors are fueling the Chinese stock market rally as they unwind bearish wagers, according to Nomura.

Such investors have been exiting short positions in Chinese equities as market sentiment rises to the highest since March, said Masanari Takada, cross-asset strategist at Nomura, citing positioning data for Asian equities.

“It appears that the market gains have been powered by global macro hedge funds and systematic funds,” he said in a note on Monday. Such investors, which include Commodity Trading Advisors and risk-parity funds, are now “covering short positions in a conspicuous way.”

The CSI 300 Index has rallied for six straight weeks to a five-year high amid surging volumes and cheerleading from state media. Chinese government bonds have sold off as signs of economic recovery prompt the country's central bank to rein in the pace of monetary easing.

Read about how China's efforts to boost stocks risk a repeat of its 2015 bubble

As the U.S. fails to slow the spread of Covid-19, investors may have increased positions in China and elsewhere in Asia because of a perception the pandemic has been more effectively contained, Takada wrote.

Absent a second wave in New York State that causes markets to cease functioning, U.S. stocks may rally this month to erase their underperformance versus Chinese stocks, he said.

“We expect that U.S. stock market gains in July will probably unfold at a sustainable pace, led by investors cautiously feeling out the market as they follow it upward,” he said.

Seasonal patterns suggest trend-following investors will likely resume accumulating long positions if the S&P 500 can maintain its upward momentum and hold above 3,030 to 3,050, he added. The gauge closed at 3,130.01 on Thursday.

(A previous version of this story corrected wording in second paragraph to show hedge funds are covering short positions.)

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