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Chinese Stocks Tumble

Following Months of Quiet Chinese Benchmarks Plummeted in a Growing Sign of Panic

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Commentary from last week’s Central Economic Work Conference pointed towards additional easing measures in the pipeline for the Chinese economy especially now considering headwinds in money markets.  The sharp rise in overnight borrowing rates following recent Yuan weakness has led stocks to once again show volatile losses.

China Stocks Echo Yuan Weakness

Fears about a prolonged slowdown are once again hitting equities in China as concerns about the outlook mount in the face of liquidity conditions which are freezing over.  Troubles in the money market following the rapid devaluation in the Yuan in the prior week have seen key equity benchmarks slide demonstrably.  While the Shanghai Composite is only down -2.59% since the overnight reopening, the Shanghai B-Share Index has slumped by -7.90%.  This is raising the specter of another round of rapidly approaching monetary easing measures that will likely include further slashing interest rates and cutting the reserve ratio requirement for banks in an effort to avoid another liquidity crunch. After retreating slightly towards the end of the week, the offshore Yuan is once again weakening against the US dollar, rallying since the weekly FX reopening.

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Japanese Industrial Figures Slip

Efforts to keep the Yen cheap for the competitive global export market are showing mixed results as evidenced by record corporate profits but overshadowed by languishing fundamental indicators.  Industrial production figures released overnight showed that industrial production slid -1.00% versus the reading in October that showed 1.40% expansion.  Aside from the weakness on the production side, consumers are not feeling the benefits of the corporate profitability as evidenced by slowing retail sales.  Consumption dropped by -1.00% on an annualized basis according to the latest figures, likely weighing on the Bank of Japan’s efforts to stimulate inflation through its quantitative and qualitative easing program.  Worrisome data has seen the Yen slide modestly versus the dollar since the reopening with the USDJPY rising 0.22%.

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Commodity Reopening Volatile

With limited focus on fundamental economic data, commodities remain a source of volatility in a largely quiet market session with oil products retreating from last week’s late gains.  Since the overnight session, futures have been notably weaker with West Texas Intermediate crude oil sinking -1.17% while Brent is down -0.82% to $37.61.  Even though the rig count fell slightly, the drop in oil inventories contributed to the rally late in the week that has since begun to undergo a correction. The spread between Brent and WTI has once again closed as the lifting of the US export ban brings the benchmarks in-line with one another despite the former historically trading at a premium to the latter.  Natural gas however is much stronger in spite of warmer weather conditions in the United States, surging 2.01% since overnight.

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Holiday Sessions Ahead

The week ahead will be marked by below average volumes as seasonal factors, profit-taking, and year-end window dressing see increased risk aversion amongst market participants.  Financial markets in the Commonwealth including the United Kingdom, Canada, New Zealand, and Australia will be closed for today’s session in the shortened week.  Thursday will see a rolling closure of financial markets across the globe as the New Year holiday approaches on Friday with equities, foreign exchange, commodities, and futures products closed until the following week.  As a result, expect limited directional momentum in financial instruments as traders pare positions and await 2016 for new investment opportunities.

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