This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
The cautious outlook was brought by a host of factors, including concerns about illiquidity, leverage, overvaluation, prospects of higher interest rates, and diminishing policy support. Other developments, such as the commodity slump and China slowdown, added to the nervousness.
Overnight market moves only served to bear this situation out. European equities traded mixed while US shares started off slippery before closing the session with good gains. Bond yields fell across the US and Europe.
The expected low volatility this week may not entice risk positioning, as investors stay put ahead of Wednesday’s FOMC minutes release. There is simply no good catalyst at the moment.
However, two pieces of news in China could provide a fillip to stock traders today. Firstly, there were renewed calls for more cuts to the banks’ reserve requirement ratio amid tighter liquidity conditions.
China Securities Journal noted that the increase in interbank money rate, falling excess reserve levels at banks and decrease in yuan positions have constricted credit levels. Coupled with expectations of further yuan weakness, China may be pressured to do more to ease the liquidity congestion.
Secondly, Bloomberg noted that the Chinese government may be close to announcing broad plans to reform its state-owned enterprises (SOEs) this month. Detailed plans from relevant ministries will be unveiled after the framework is revealed. The proposal was delayed as the authorities grappled the recent stock market rout.
While the dust on the yuan devaluation has more or less settled, there will still likely be more pairs of eyes watching the USD/CNY mid-point fixing. Goldman Sachs has lowered its forecast for CNY, expecting worsening China’s economic slowdown to weaken the local currency.
Further slide in the yuan would turn up the pressure on Asian currencies. The US investment bank noted that THB, TWD, KRW, and MYR are particularly vulnerable to yuan depreciation.
As I have mentioned several times before, the PBOC is expected to intervene if there are excessive volatility in the FX markets, as well as to hold back capital outflows. Bloomberg estimated that it will cost China around $40 billion a month to ensure the yuan is stable.
Given its massive foreign-exchange reserves, it could take a while before they run out of money. Nevertheless, the PBOC is unlikely to change the direction of yuan moves, but merely to smooth out its path, after its policy shift to a more market-determined mechanism.
Looking ahead to Asia, I expect cautious undertones to accompany trades today. Meanwhile, a bomb blast in central Bangkok on Monday evening has claimed at least 19 lives. There is still a dearth of details, but there are concerns that the explosion may set off renewed violence in Thailand.
The country is currently still under a military rule after the May 2014 military coup displaced former prime minister Yingluck Shinawatra. THB weakened further to around 35.50 per USD following the explosion and extended lower in early Asia.