Volatility indicators are generally used as an indication of market sentiment, with lower numbers indicating an uptrend in stocks and vice versa. This may mean stronger Hang Seng Index leading towards the end of the year, resulting in more inflows of funds globally into Hong Kong, making the 7.75 peg more vulnerable and harder to defend.
The cost of protecting against losses in Chinese stocks relative to U.S. equities fell to a one-year low on prospects the slowdown in the worldâ€™s second-largest economy will ease.
The AlphaShares Chinese Volatility Index, derived from options on companies listed in Hong Kong, traded at 18.61 on Oct. 31, 1 percentage point above the Chicago Board Options Exchange Volatility Index and the smallest gap since September 2011. The premium has narrowed from as much as 1.43 percent on Sept. 9. Both the Hang Seng China Enterprises Index (HSCEI) and the iShares FTSE China 25 Index Fund, the biggest Chinese exchange- traded fund in the U.S., touched the highest level since May last week.
The yuan strengthened to a 19-year high on Oct. 29 and monetary authorities in Hong Kong intervened to curb gains in their dollar as flows into Chinese equity funds surged to the most since 2008 in the week to Oct. 24, EPFR Global data showed. Improving reports on industrial production, manufacturing and retail sales since Oct. 18 have bolstered prospects the worldâ€™s second-largest economy may be recovering after a seven-quarter slowdown.
â€œThe fear indexes such as volatility are down as some real optimism about the Chinese economy appears to be coming back,â€ Kevin Carter, co-founder and chief executive officer of Baochuan Capital Management LLC, which oversees about $325 million, said by phone from San Francisco on Nov. 2. â€œOver the last eight weeks a switch got turned on regarding China and as the market has gone higher, it reinforced a more favorable outlook.â€
Via – Bloomberg