China & oil put markets to flight

Heading into the close the FTSE 100, along with most other major indices, is heavily in the red as China FX movements and another fall in oil crush risk appetite. 

City of London
Source: Bloomberg

It will be hard to gauge the long-term impact of China’s decision to intervene in the value of its currency, but that hasn’t stopped stock markets from moving southward with alacrity. One thing is clear, however, and that is the weak state of China’s economy, or at the very least concerns that things will get worse unless action is taken. Markets have become rather too accustomed to the idea that Chinese growth will decline gradually below the 7% level, but they may be in for a rude shock if the slowdown is more rapid than expected.

ZEW numbers from Germany were poor as well, providing little incentive to chase European indices higher; indeed, with the European recovery seemingly in stall  mode, it looks like investors have run out of reasons to continue allocating funds to Europe.

Yet another plunge in oil prices has added to the general risk-off atmosphere this afternoon, with the usual August caveat that lower volumes will lead to more dramatic movements. Saudi Arabia’s cut in oil production seems to be just a symbolic act, as the long-running oversupply story comes into focus once again. This will only intensify as Iranian production hits the market, suggesting that energy firms will be at the forefront of any correction in equity prices. 

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