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US shares were trading around the previous day close before coming under strong downward pressure late in the session. The energy sector was the worst performing, trading 1% lower, to take S&P 500 down 0.6%. Part of the reason was the EIA oil report which showed US crude inventories rose by 8 million barrels last week. WTI prices edged lower for the third straight day towards $45 on Wednesday, bringing week-to-date decline to -4.4%.
China markets were dealt a strong blow yesterday, with most Chinese indices chalking up large losses. The Shanghai Composite dropped -3.1%; CSI 300 down -2.9%; Shenzhen Composite fell -5.9%, dragged by over -6% tumble in ChiNext.
However, Chinese equities are still higher in the holiday-shortened month, with another week or so to go. For the SHCOMP, the 3500 level continues to be elusive, and the government may be comfortable with the current price level, after recent gains.
The authorities have been pumping in liquidity in the financial system. The PBOC supplied CNY 105.5 billion or $16.6 billion at 3.35% to 11 commercial lenders yesterday, via the Medium-term Lending Facility (MLF). While the monetary authorities are keen to keep liquidity ample in the banking system, this cash injection may not reach large Chinese corporations facing problems in debt repayments.
Sinosteel Co failed to make interest payments yesterday, saying that it plans to extend the deadline as it is looking to add a unit’s stock as collateral. With the ongoing state-owned enterprises (SOE) reforms, the government may be less willing to support such ‘zombie’ companies.
This suggests that we could see an increase in corporate debt defaults. Already, Moody’s noted that the coal mining, steel and shipbuilding industries have the highest default risks, according to Bloomberg.
In the currency markets, the euro appeared to have wedged into a tight range in recent sessions ahead of tonight’s ECB meeting. The EUR/USD was trapped within 1.13-1.14 over the past four session. However, the pressure on the single unit currency may be on the downside, as Bloomberg noted that option prices show that traders are increasingly betting the EUR/USD to turn lower.
There is an expectation that ECB Draghi may step up rhetoric on more easing to bring up inflation and support growth. The positioning indicates that if the ECB sticks to a neutral line, we could see a jump in euro, although the 1.15 barrier remains the key resistance to watch.
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