The third day of ‘stable’ fixes for the CNY – 6.5628 is virtually unchanged from Monday and Friday’s fixing rate and looks to have, on the currency side at least, halted the hugely oversold positioning building in the markets.
The other positive from the stable CNY fix is that it has seen a closing of the gap between CNH to CNY. It will allow international capital investors looking to either hedge or get exposure to the mainland currency to use CNH as it had been intended.
However, I would still point to the issues facing the China thematic – is the PBoC trying to export its disinflation problem to the world or is it just adding uncertainty? Are we witnessing the beginning-of-the-end to the ‘medium to high level’ of growth China has been accustomed to? Will that mean a demand/supply equation that needs to shift again?
It remains a valid macro thematic concern – Asian markets remain jittery to these questions and I understand and view the bounce in the US and Asia today as positive and justified responses to the irrational trading period in the past week. China will dominate thinking for the foreseeable future and the fix is key to that thinking.
The impact that the fix has on intraday sentiment is interesting, particularly for China-risk facing markets.
The ASX has been an epi-centre of trade during its mid-session as the fix is released at 12:15 AEDT. The decline today has been replicated daily for the past seven sessions. From around 12:30 AEDT, it has declined each time.
In fact, the fix is beginning to be the most important intraday trading theme in Asia. It’s dividing the trading day into a pre-fix ‘positioning’ session and post-fix ‘trading’ session.
What’s more, the more China-exposed an economy is, the higher the movements in its currency and its index – the ZAR, INR and IDR are case in points. The moves in emerging market indices post the fix show just how important it has become to fund managers’ intraday thinking.
Further risks for the world market
Clear fear of an August-style devaluation to the RMB – the risk-to-risk assets is large if this materialises.
FX reverses – what’s the PBoC’s limit? Speculation is at $US3 trillion, with most estimates putting current reverses at US$3.33 – this is getting a little thin if that is indeed the limit.
Chinese equities continue to splutter – leveraged accounts continue to put pressure on intraday trading. Margin calls are being triggered and limit down issues are causing panic for margin clients. Despite the new ‘major shareholder’ rules, the risk in Chinese equities from retail leverage is clearly evident and intraday trade remains irrational.
China is making trading slightly tricky. I have remained short oil (Brent and WTI), short cyclical risk (material and energy stocks), long defensives, healthcare, JPY and indices with further central bank stimulus – moving into DAX positions.
I can see a bounce in oversold indices. US earning season has very low expectations and is likely to provide a short-term bounce to US markets as corporates beat the low-ball expectations, and by translation, into oversold risk markets. However, I am vigilant and prepared to go to cash if the risk issues continue. Keep your stops near.
FTSE 100 5901 +29
DAX 9902 +77
CAC 40 4344 +31
IBEX 35 8902 +16