Another Chinese fall
Yet again a large and vicious sell-off in China is shaking markets as Europe wakes. Following Monday’s 7% sell-off and early closure of the Shanghai Composite, a similar dump took place last night with the market closing for the day after only 30 minutes of trade. Waking to a text from friends in our Hong Kong office that simply say ‘Mega Chinese equity horror’ has been the most consistent trend of 2016 so far.
Nervousness in Chinese and regional emerging markets has been exacerbated by another People’s Bank of China weakening of the yuan. The Chinese central bank moved its reference rate by 0.5% overnight, the greatest amount since the August devaluation. The offshore yuan rate tumbled once again before settling down as the central bank intervened to prop it. This speaks to our belief that the People’s Bank of China is attempting to narrow the difference between the onshore and offshore rates while weakening the yuan overall.
Oil at 12 year lows
The global problem of excess supply and limited demand is being played out on a day by day basis in these markets, as well as in oil, which has fallen to the lowest level since December 2003.
Movements within the G10 crosses have remained relatively sanguine overnight, however, although USD remains very much on the front foot against the commodity currencies, particularly the Canadian dollar. Until supply dries up, something that seems a long way off following news of record oil inventories in the US yesterday, the oil price will remain low; a great benefit for consumers in non-oil exporting countries.
UK services sector lacks encouragement
That being said, the UK services sector gave sterling a little chill yesterday. The most important PMI for the UK economy slipped in December as ‘firms’ longer term expectations for business activity fell to the weakest since early 2013. The pessimists amongst you may be asking whether growth has already rolled over? I think not yet but the impetus that the services sector can rely on is starting to slip. Unemployment gains are also slowing but this is likely to be a result of a tightening of the labour market and an elimination of slack; we are on sentry duty for higher wages and the beneficial effects that they will bring.
The EU referendum is also still hanging over sterling and continues to limit any upside.
Fed and the Day Ahead
Mixed news from the German economy this morning has yet to give euro a prod in either direction but factory order gaining by 1.5% on the month will keep the ECB’s focus on a weaker euro through 2016.
Such has been the turmoil from China that it is easy to forget that the latest minutes from the Federal Reserve were published last night. Overall the tone of the release was slightly dovish, with an explicit focus on the benign inflation outlook. Focus must now switch to tomorrow’s payrolls numbers which are still the most important indicator for the US economy. We look for job gains of 215,000 on the month but crucially, as in the UK, the wage picture is what will define inflation and therefore US dollar performance.
Eurozone consumer confidence and unemployment figures are due this morning before Fed and Bank of Canada voting members speeches this afternoon. That being said, it will take something pretty special to draw market attention away from the Chinese nightmare.