Markets have started the new year under
pressure, with Chinese equities down 7% on 4 January (before automatic circuit
breakers kicked in), the Dow Jones shedding 1.6% and the FTSE nursing a 2.4%
loss – the worst first trading day losses for many years. Some normality
returned to markets on 5 January but only after Chinese policy-makers stepped in
to stabilise Chinese equities.
There are multiple causes for this
first-day rout, which individually the market would have probably brushed off
but which in aggregate were sufficient to give investors a real fright. The UK
manufacturing PMI and in particular the US ISM data for December, released on 4
January, were unequivocally weak – markets will have been looking for decent US
and global data to vindicate the US Federal Reserve’s recent decision to start
hiking its policy rate. The geopolitical backdrop of rising tensions in the
Middle East, concerns about the sustainability of currency pegs in
oil-exporting nations and ongoing weakness in emerging market currencies
(including the Russian rouble) likely compounded this risk aversion.
Moreover, the Chinese central bank’s
decision to allow the renminbi to slide further against the US dollar will have
reignited market fears that the PBoC will devalue the currency to support
slowing Chinese export and GDP growth.
But only when the market has more data and
policy decisions to digest will we get a better sense of whether this
early-year bearishness is a blip or a more entrenched trend.
For starters, trading volumes were
reasonably light on 4 January which may have exacerbated price action
Also, much is being made of the Chinese PMI
data for December but the numbers were arguably pretty uneventful. The official
manufacturing PMI in December was bang in line with the average of the previous
four months while the Caixin PMI was actually higher than the average of the
previous five months. Moreover, the official non-manufacturing PMI jumped to an
18-month high of 54.4 in December – not insignificant given that the service
sector now accounts for more than half of China’s GDP.
Staying on the topic of China, the renminbi’s
path is less dramatic than is being reported in the press. The PBoC did fix
USD/CNY to a new multi-year high of 6.5169 today but most major and emerging
market currencies have weakened versus a buoyant US dollar. Only the yen has
managed to post small gains in the past two trading sessions. As a result, the
renminbi trade-weighted-index (TWI) has actually been very stable in the past
twelve sessions according to my estimates. This matters as we know (now
officially) that Chinese policy-makers pay close attention not only how the
renminbi trades against the dollar but how it trades against the currencies of
its main trading partners.
It would seem that for now at least the
PBoC’s preference is for a broadly stable renminbi TWI. Furthermore, the
government has decided to extend the ban on short selling of Chinese equities
beyond Friday’s original deadline. This may end up being a band-aid on a broken
leg but it does highlight policy-makers’ willingness to try and stabilise
To be clear market bulls have had little to
cheer about in the past 48 hours but there will be far more significant events
– both positive and negative – to deal with in the next 363 days.
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