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The dragon conundrum

China is becoming the single biggest concern for markets.

China
Source: Bloomberg

Yes, Greece is going to be a talking point as it clearly has a banking crisis and Grexit is a real possibility. However, the run on in Chinese equities is a global risk and a conundrum that is building to a crisis point.

 

China’s kitchen sinking over the past two weeks

The PBoC has simultaneously cut the reserve requirement ratio (by 50 to 300 basis points, depending on institution) and benchmark interest rates (by 25 basis points) - the first time since 2008.

It significantly reduced its 7-day repo rates - leaving more liquidity in the market.

One of China’s largest state-own pension funds has confirmed it is only purchasing Chinese ETFs and will not sell.

Another pension fund has banned its advisers from selling a single stock.

The Chinese regulator has (basically) suspended all new IPO listings. Companies can prepare for listing but there is a restriction on when and how to list, plus the size of the listing.

The CRSC (Chinese regulator) has also banned all short selling.

US$19 billion has been invested into a suitability fund headed by CITIC, along with 21 other private institutions to sure up depth screens.

The CSF will boost its capital base to RMB240 billion from RMB100 billion to increase liquidity to the market.

PBoC has also extended RMB250 billion in lending to 11 financial institutions for increased liquidity.

State-owned newspapers have used their strongest language yet, telling people ‘not to lose their minds’ and ‘not to bury themselves in horror and anxiety’. [Our] positive measures will take time to produce results.

 

However:

Yesterday Shanghai opened up over 7% and the CSI 300 over 9% - both closed up 2%. Both traded in the red throughout the day and lost as much as 1% - that is an intraday move of 10% for the CSI – volatility is so high it will force participants out due to the price action alone.

Chinese ADR’s has had their worst trading day last night since September 2011, falling 5.1% overnight. Weibo, Xunlei and Changyou all lost more than 12%.

Despite the PBoC and Chinese government’s attempts to dam the outflows, it appears to be futile.

 

Commodities routed

TWI has fallen over 7% in 24 hours – most of this fall happened during the Asian session but it lost another 3% in the US session. Today the energy space will take a beating on the TWI and Brent prices from last night.

Iron ore lost over 5%. China’s current issues are playing havoc with iron ore futures – spot prices are following suit. Yesterday saw multi-year lows in the pure play space. Yesterday was Rio’s lowest price since June 2013 and it was FMG’s lowest price since January 2009.

 

RBA rates day

Since the last RBA meeting:

  • The TWI AUD is down 1.8% to 62.4.
  • AUD/USD is down 1.7% to $0.7499.
  • AUD/JPY is a still a key trade and lost 3.5% over the past month, while GBP/AUD is also one to watch, up 3%.
  • 2-year treasuries are stuck in a range around 1.821% (no rate cut expectations there).
  • The big four banks have been basically unchanged in the past four weeks (interesting considering the risks).
  • The medium estimate for the AUD come the December quarter is 73 cents (the range is 68 cents to 85 cents).
  • Expectations for today? All economists agree there will be no change at today’s meeting. The interbank market is pricing in a 7% chance of a cut.
  • Will China be a concern for the board? It should be.

 

Ahead of the Australian open

With a muted reaction to the Greece situation from Europe overnight, I would expect a bounce in defensives today after having seen two very solid days of selling.

Clearly the market sees the risks from Greece as being ring-fenced and unlikely to create contagion. However, I would be vigilant here.

China will weigh and the rout in commodities will hit the cyclical space with material and energy spaces in for real pain today. We are currently calling the ASX up 34 points to 5508.

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