Liquidity concerns to take center stage

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Stock investors continue to be concerned this week about the possibility of less liquidity in the market amid China's tighter monetary measures as well prospects for a firmer US dollar, leading analysts to warn of a severe fluctuation in the market.

Their concerns are expected to linger after the Shanghai stock market dropped the most in 14 months last Friday, following a tumble in most commodity futures on both domestic and global markets driven by a rebounding greenback.

Investors have been selling stocks and commodities to purchase dollars after the US Dollar Index jumped to above 78 points, its highest since October 8, market watchers said.

"The market has gradually digested the effect of US Federal Reserve's quantitative easing," said Ou Baolin, a fund manager with Harvest Fund. "Historically, stock markets in emerging countries would usually tumble after a rebound in the US dollar."

Analysts cautioned investors of a correction and predicted the Shanghai Composite Index will "violently" fluctuate between 2,960 and 3,040 points based on technical analysis.

"Pressure for profit taking grew stronger after the index climbed to above 3,150 points, and there is support for the market at 2,950," Cheng Junjie, an analyst at Huabao Securities, wrote in a note.

Investors are advised to see in which direction the market is heading.

"Market response for a tightening liquidity may be lagging," GF Securities said in a note. "There is not yet a clear signal of a rebound after last Friday's tumble."

Some analysts were, however, modestly positive about the market in the mid-term backed by corporate earnings.

"The stock market may pick up after falling below 2,950," said Li Song with Minsheng Securities.

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