Some relief in Asia

If today is going to be like last Tuesday, then we could see some relief in Chinese markets, without the spectre of circuit breakers looming overhead.

China Flag
Source: Bloomberg

Market players should be very cautious for the rest of the week, if it is going to exactly be like last week.

Nowadays, the performance of Chinese equities appeared to have a profound contagion on global markets, despite a still limited access to the onshore markets. Wall Street Journal suggested that the market influence belies a troubling possibility, which is that China may be fumbling its management of the country’s economy. In other words, it is not so much the actual fall in equities which matters, but how they are perceived by foreigners.

The problem is that it is hard to assess Beijing’s job performance in navigating the behemoth economy through a difficult phase of economic restructuring. To complicate issues, China’s action is often misunderstood at best, and perceived with great scepticism at worst. To cite an example, the recent weakening of yuan was interpreted as China’s renewed intention to depreciate the currency to boost export competitiveness.

However, since the shift to a market-determined method for the daily yuan fixing, as well as the change from a USD-CNY peg to one based on a basket of currencies, it is harder for the PBOC to influence the direction of the yuan. To do that now, they have to intervene in the FX markets to affect the closing price of the yuan. The fixing is determined by a few factors, including the closing yuan price of the previous session and the changes in the currency basket. 

After yesterday’s sharp sell-off, there could be some bounce in the Chinese markets, which would offer a respite for global markets. Clearly, the yuan fixing will also affect sentiments. A prima facie look at USD/CNY closing price in the previous day (6.5711) and the performance against various major trading partners’ currencies suggests that we could see another marginally stronger yuan fixing today. It will go a distance in allaying yuan devaluation concerns, at least for the time being.

Australia already started off on a positive tone, although Japan is in losses in early hours, driven by catch-up action after a long weekend.

 

Market

  • US markets were quite muted in the overnight session despite Asia stock slump. S&P 500 closed nearly flat at +0.1%, while the Dow managed better at +0.3%. European shares remained in the red. Euro Stoxx 600 ended -0.3% lower.

 

  • Euro weakened, slipping to mid-1.08 levels against USD, while recent yen strength dissipated somewhat. The decline in USD/JPY stalled around the 117 mark.

 

  • Oil prices have been much affected by speculations and estimates of US crude production and stockpile data. WTI and Brent tumbled over 5% on Monday. Brent fell to new 12-year lows at $31.55, eyeing the April 2004 lows of $30.21. US crude inventories probably rose 2 million barrels last week, according to a Bloomberg survey. Energy shares may come under pressure today, limiting any relief rally.

 

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

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.