Asian equity markets have all but closed the sentiment gap with mainland stocks over the past month, suggesting stiffening headwinds in coming weeks after weeks of strong capital inflows. The mainland's industrial metals and mining stocks, based on the FTSE China indices, could be the proverbial canary in the coal mine. An entrenched downtrend that began in 2011 and ended in the first half saw the sector underperform the broad market by 50 per cent over the period. It has outperformed by 11 per cent since mid-June. This signals a change of trend, but an important technical point has been reached with sentiment now at excessively optimistic levels, based on proprietary sentiment barometer indicators. In the past 10 years, such extended optimism has been followed by a 2 per cent reversal against the market over the following month and a more material pullback over three months. The breakout is positive over the longer term, but the risks are rising in the near term.
