China sparks another bout of risk aversion

Yesterday’s markets

12th January 2016

  • EUR Sentix Investor Confidence: 9.6
  • USD Labour Market Conditions Index m/m: 2.9
  • CAD BOC Business Outlook Survey
  • JPY Current Account: 1.42T
  • GBP BRC Retail Sales Monitor y/y: 0.1%

The Shanghai stock exchange started this week on the back foot once again, registering another heavy decline, this time 5.3% after investors continued to raise concerns over Chinese stocks. Chinese markets plunged 10% last week even after the Yuan gained ground against most of its counterparties on the back of another stable fixing by the PBOC. The main benefactor to the slide in stocks once again was the Euro as it moved towards key psychological levels against the US Dollar before retracing slightly. Meanwhile, the price of oil continued its tangible price action link with Chinese market as it fell to a fresh 12 year low with some commentators predicting that this could fall to $20 per barrel this year. The link between oil and inflation puts a grey cloud over the impact that this could have on potential rate hikes from both sides of the pond.   

The South African Rand suffered something of a flash crash when it opened for trading, depreciating a massive 9% against the Dollar before retracing slightly to recover some of its losses. It was said that Japanese investors were bailing out of long positions in the South African Rand, causing a catastrophic decline in the commodity driven currency. The decline adds fuel to the fire as the South African Central Bank will act more aggressively at its policy meeting this month.

Today’s markets

11th January 2016

  • GBP Manufacturing Production m/m
  • JPY BOJ Gov Kuroda Speaks
  • USD FOMC Member Fischer Speaks
  • GBP BOE Gov Carney Speaks
  • USD JOLTS Job Openings
  • CNY Trade Balance

The UK releases the Monthly Manufacturing Production figure and Industrial Production, where manufacturing is expected to return above 0% from the previous -0.4% and industrial is forecast to decline slightly to 0%. The weaker than expected economic data has pushed back expectations of a rate hike in the UK from Q4 2016 to Q1 2017. If we see the data trend continue then this will only weaken the case for Sterling ahead of the BoE meeting on Thursday.