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Painting the town red

The first trading day of 2016 did not start off on auspiciously, as risk took flight.

People's Bank of China
Source: Bloomberg

All the classic signals of risk aversion were flashing - falling equities, rising sovereign debt, Yen buying, spike in VIX index.

Asia started the ball rolling, with Chinese equities coming under immense pressure, driven by a host of reasons. Chief among them was the fact that traders are not seeing clarity on the direction of growth.

As we are all too familiar with, uncertainty is quite bad for the financial markets. China Caixin PMI numbers remained in contractionary zone, accompanied by weak US ISM manufacturing (48.2).

Dampening the Chinese sentiments were the imminent expiry of the six-month sales ban of large shareholders, as well as the lower yuan guidance by the PBOC. All of this played into a maelstrom of fear, which carried over to the overnight session. It was unfortunate that the Chinese circuit breakers were tested on their first day in operations.

CSI 300 tested the 5% mark, which triggered a 15-min suspension, before going all out (or down) to 7% which set off a session closure. Bear in mind that the percentage change (5% or 7%) works for either direction (up or down), but I don’t think anybody will complain when markets are going up.

The mood today will be sombre. I feel that the Chinese markets will come under more pressure. There is a possibility that the authorities may intervene to prop up the markets via the ‘National Team’, but Beijing is arguably more concerned over growth than the stock market.

Furthermore, it could look really bad if they have to throw in more measures when they are in the process of withdrawing the rescue measures. That scenario is probably why the circuit breakers were introduced, although these will hardly stop the direction of the markets, just delaying the move.

 

Markets

  • CSI 300 plunged 7% to trigger a market closure, where we saw the Shanghai Composite lost 6.7% and the Shenzhen Composite dived 8.2%. Most sectors underperform the Shanghai Composite, with IT, consumer discretionary, materials, health care and industrials among the worse, down over 8-9%.

 

  • S&P 500 plummeted towards key 2000 from the get-go, and traded below it for parts of the day, before closing -1.5% lower at 2012.66. Financials were the worst underperformers, dropping -2.1%. Energy received some reprieve from the recovery in oil prices.

 

  • Euro Stoxx 600 fell -2.5%, dragged by materials, consumer discretionary, financials and IT. DAX nose-dived 4.3%, alongside over 2% losses in FTSE 100 and CAC 40.

 

  • Flight to safety ensues as not only USD/JPY fell below 120, but challenged the 119 handle, eyeing strong support at the 118-119 region. The dollar index pulled back initially but managed to rebound to high-98, which dragged EUR/USD below 1.08 at one point.

 

  • Gold jumped +1.3% to $1080+ but bulls failed to take out the 50-day moving average at 1084.30. This suggested upside momentum may wane into the rest of the week.

 

*For more timely quips, you may wish to follow me on twitter at https://twitter.com/BernardAw_IG

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