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China concerns beginning to rear their ugly head again

Inklings of concern about China’s support for its industrial sector are starting to hit metals prices, and commodity-linked sectors are exerting the biggest drag on equity indices globally.

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The materials and energy sectors held the S&P 500 back from closing in positive territory, despite the Dow Jones seeing 8 straight days of gains – its best run since March 2013.

Dalian iron ore futures were within a hair’s breadth of hitting the daily limit down loss of 10% yesterday, and the active Dalian futures contract in Chinese steel rebar has lost 9.7% in the past two days. A nasty fight has blown up among bond holders of defaulted Dongbei Special Steel, and after the Liaoning government tried to push through a debt-to-equity swap deal with no consultation, bondholders are now calling for the government to ban the issuance of all debt financing by Liaoning-based enterprises. Liaoning being a key industrial province and a major driver of commodity demand. This comes as iron ore inventories continue to surge at Chinese ports and more detailed Chinese GDP data underlined how much stimulus and credit to the industrial and construction sectors bailed out a weakening economy. This is not good news for the Aussie dollar, which dropped over 1% through the US$0.75 handle overnight, closing the session US$0.7505.

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The Turkish central bank cut interest rates by 25 basis points to 8.75%, but it seems likely that they will have to be cut further. Turkish president, Recep Tayyip Erdoğan, escalated his purge in the wake of the coup by sacking 15,000 officials from the Ministry of Education and calling on NATO-ally, the US, to hand over cleric Fethullah Gülen who the government blames for orchestrating the coup from Pennsylvania. These moves in commodities and concerns over Turkey did not help the main emerging markets ETF, the iShares MSCI Emerging Market Index, which lost 1% during US trade.

Italian banks also sold off again overnight after the European Court of Justice ruled Slovenia’s 2013 “bail-in” of junior bondholders was legal. This was a blow to Italy who is desperately trying to find a way around the EU’s stringent new rules on mandatory “bail-ins” before any public money can be given to the banking sector. Banca Monte dei Paschi di Siena, one of Italy’s most troubled, lost 3.3% while UniCredit SpA, one of Italy’s comparatively healthiest, lost only 0.3%.

The Japanese yen and the US dollar saw strong buying overnight as investors began to start seeking out safe havens again and as US new housing starts came in better than expected.

The strength in the yen against a range of other currencies is setting the indices:JP225|Nikkei] up for a difficult day unless some Pokémon-related ebullience can overcome it. The ASX will be fought over competing drivers, the poor performance in commodities should see materials and energy weigh on the index, but good results from Goldman Sachs in the US overnight may continue to see funds flowing into financials today. Currently, we are expecting to see the ASX open flat, with the rest of the Asian region opening in negative territory.

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