Once again, it is all about China. Recently traders’ main concern had become the reference rate or fixing rate at which PBoC price the Yuan against the U.S. dollar, a daily routine announced to markets at 9:15 am Shanghai time or 1:15 am GMT. Today, the PBoC set the Yuan’s midpoint slightly higher for a second day after letting it fall for eight consecutive sessions, a move thought to calm investors after suffering one of the worst weeks in financial markets. However, markets reaction wasn’t as desired to be as Chinese investors were in rush to sell equities, sending Shanghai composite 5.3% lower and Shenzhen 6.6%. The selloff stretched throughout Asian markets sending all major indices lower but the more worrying sign was lending rate between Hong Kong banks jumping to record high. Over the weekend China CPI figures also disappointed, as inflation barley edged up last month to 1.6% from 1.5% in November, while producer prices were unchanged at -5.9% adding to concerns about growing deflationary risks within the economy. Wednesday will be watched very closely as Chinas trade balance is due to release, and will be interesting to know by how much imports and exports are impacted by the slowdown.
The safe have Yen trader higher approaching 2015 August’s black Monday levels as USDJPY dropped to 116.68 before recovering 70 pips later in the session. Japanese markets were closed for public holiday, but this did not prevent traders from buying the save haven. The Yen appreciated 300 pips from the beginning of the year, and is likely to remain firm if turmoil in equity markets resumed. Part of the USDJPY selloff in early Asian trade was caused by unwinding of carry trades against the high yielding South African Rand, meanwhile Friday CFTC’s report also showed that speculators turned into net long on the Yen. As long as Japans central bank does not intervene and markets turmoil resumed we expect the USDJPY to continue its downtrend with first target being 116.46 “25 Aug low”.
Oil prices continued to suffer losses today and fears are growing that we aren’t yet close to a bottom, but the longer term outlook should be more worrying, especially when looking at futures contract for 2020 which indicates prices likely to trade below $50 on the longer run. On the other side, option markets are providing fresh signals that prices could continue moving lower as put options premiums to sell at $25 are increasing. Some investors are even buying puts at $20; either for protection or betting on prices to drop below $20, indicating that turmoil is not over yet in energy markets.