It was a relatively calm overnight session in which European stocks wobbled modestly, Japan was up, China was down following the Yuan’s weakest fixing since 2011 as the PBOC continues to aggressively devalue since the SDR inclusion (stoking concerns capital outflows are once again surging), EM stocks, stocks were weak and the dollar was unchanged ahead of today’s retail sales data and next week’s Fed meeting, and then suddenly everything snapped.
First it was oil, which after falling calmly all session suddenly hit an air pocket following the latest IEA report, in which the energy agency said global oil markets will remain oversupplied at least until the end of 2016 as demand growth slows and OPEC output booms, putting oil prices under further pressure, the International Energy Agency said on Friday.
The IEA said the global oil glut was set to worsen in the months to come as additional supplies from Iran – when and if Western sanctions on the country are removed – would push more oil into storage.
The immediate result: Brent slid below $39 for only the first time since 2008, while WTI is fast approaching the dreaded $35 handle. Ironically, several days ago when we noted that Brent and iron ore were both at $40 we said the two are racing each other to $0. Today, both Brent and Iron Ore hit $38. So far nobody is winning.
Almost at the same time EM currencies woke up to the threat of a USD rate hike next week, and proceeded to mini tantrum once more taking China’s stealth devaluation lead, with the South African rand continuing its collapse from yesterday when in the aftermath of the sacking of the finance minister all local risk assets tumbled. Today, it’s more of the same.
And then the weakness finally spread to US equity futures, which after doing what they do best for most of the overnight session, i.e., ignoring everything around them, suddenly fell off a cliff, dropping as much as 16 point in just a few minutes.
As a reminder, it was China’s devaluation that launched the global market turmoil in August that ultimately forced the Fed to delay its September rate hike. If China wants to repeat this performance it has 2 days in which to do it.
For now, this is how global markets look like
A closer look at the markets reveals that in the final session of the week, Asian equities shrugged of the positive lead from Wall Street to trade broadly in the red, as weakness in China dampened sentiment. As such, Asian stocks headed for the biggest weekly drop since Sept. Chinese shares slid after a report billionaire Guo Guangchang was missing added to concerns that slowing economic growth. Yuan recorded its biggest weekly drop since an August devaluation.
“Asian markets had a mixed day to end the week,” said Angus Nicholson, Melbourne-based market analyst at IG Ltd. “Japanese markets have clearly reached levels where investors are happy with valuations again. Chinese markets were spooked by the ‘disappearance’ of Fosun’s chairman, quite likely by China’s anti-corruption department.”
The Shanghai Comp (-0.7%) was weighed on by financials amid growing concerns over increased capital outflows, as the PBoC continued to depreciate the CNY fix to bridge the gap with the CNH. While Chinese stocks had also been spooked following reports that the Chairman of the nation’s biggest non-state-owned conglomerate (Fosun), had disappeared, igniting probe speculations. ASX 200 (-0.2%) was dragged lower by materials as iron ore sustained its downward spiral having fallen 1.4% in the prior session. Nikkei 225 (+1.0%) bucked the trend with Japanese exporters benefitting from the weaker JPY. JGBs fell amid spill-over selling in T-notes despite the BoJ entering the market.
China’s State-owned Asset Supervision and Administration (SASAC) said that SOEs which are unprofitable for 3 years should leave the market and that they will shut, suspend or recognize long-term unprofitable SOEs in overcapacity industries which fail to adhere to environment, safety and quality standards. Also in China overnight we got New Yuan Loans data, which rose by CNY708.9B, below the Expected CNY735.0B.
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