(Bloomberg) -- Short covering may have driven outsized gains in Hong Kong stocks on Tuesday after China’s central bank unveiled a broad package of monetary stimulus measures, according to JPMorgan Chase & Co.
The city’s short sales ratio as a percentage of total market turnover dipped to 13.6% on Tuesday from 15% to 22% last week, strategists including Wendy Liu wrote in a note. That brings the ratio to one standard deviation below the average since 2016, indicating that many shorts have already been covered.
A gauge of Chinese stocks traded in Hong Kong capped its best day in over a year on Tuesday after Beijing’s latest round of measures lifted the country’s beleaguered equity market. The steps announced include moves to boost bank lending, reduce borrowing costs on existing mortgages and allow funds and brokers to tap the central bank’s funding to purchase shares. Authorities are also weighing a stock stabilization fund.
The Hang Seng Index and the onshore benchmark also surged.
But concerns remain that the stimulus-driven rally may not be sustainable. Given that previous stock rallies in China had fizzled, “sizable allocations will likely be cautious, particularly ahead of the US presidential election,” the JPMorgan strategists wrote.
The bank has a base-case target for the MSCI China Index and CSI 300 Index of 60 and 3,500, respectively, by the end of the year. This implies an upside of 4.4% for the onshore benchmark from Tuesday’s close.
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