The relentless pounding that investors suffered in the first two weeks of the year has subsided. It is too early to have much confidence that a turn is at hand. By various measures, the sell-off had stretched the technical condition. In any event, the stability of the yuan, gains in the Chinese stocks, and a bounce in oil prices appears to be giving the bears a day off.
The market is trying to get its bearings today. The large decline in the US equities before the weekend has had modest spillover effects elsewhere. Equity markets, barring the Shanghai and Shenzhen Composites, are mostly modestly lower. The MSCI Asia-Pacific Index is off about 1% while the Dow Jones Stoxx 600 is less than 0.5% lower in late-London morning turnover.
Two weeks into the year and most investors are nursing sizable drawdowns. The recovery in the US equities on January 14 looked like a potential turning point. However, the coattails proved non-existent, and the bull trap sprung with new downside momentum established before the weekend.
The obvious takeaway is that the current driver is not in New York. In addition, to be sure, we are not just talking about equities, but during this market meltdown, correlations between various asset classes and instruments have increased (or become more inverse).
There are three developments today, which while not driving the market, are important for many investors. The first are comments from German Finance Minister Schaeuble and EC President Juncker. The second is an important development in Poland. The third are growing problems in Greece.
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The recovery of US shares and oil yesterday provided short-lived. Asian shares ended lower with the help of Chinese equities. The 3.5% fall in the Shanghai Composite today brings the year-to-date decline to a little more than 18%. Taiwan, which goes to the polls this weekend (the opposition that has been critical of the government’s pro-China policy is ahead) bucked the trend to post minor gains.
Investors still have not found solid footing this year. Equity markets have continued to sink, even though China’s equities advanced. Bond markets are mostly firmer, with the US 10-year yield seemingly being drawn back toward 2.0%. Oil prices are little changed, after Brent slipped to marginal new lows. There is much talk about the Iranian sanctions being lifted as early as Monday.
The US dollar itself is mixed. The yuan weakened about 0.25%. The renewed pressure so new widening of the onshore and offshore yuan.
For months, economists have worried about the state of the Chinese economy. As the world’s second largest economy, a slowdown of the Chinese economy could drag down the economy of the entire world. Fortunately, China’s economic slowdown may end later this year according to a report released Monday by the Organization for Economic Cooperation and Development (OECD).
Many of the capital markets are enjoying reversals today. Equity markets are mostly higher. The MSCI Emerging Market equity index is up more than 1%. Several key commodities, like oil and copper, are firmer. Bond markets, outside the US, are firmer, with the Japan’s 10-year yield slipping to new record lows slightly below 20 bp.
Chinese shares continued last week’s plunge, with the Shanghai Composite off 5.3% and the Shenzhen Composite falling 6.6%. Both indices closed on their lows. With the apparent help of officials, the onshore yuan strengthened, though the real squeeze was in the offshore yuan, which strengthened by nearly 1%, the most in four months.
A tumultuous start of the year saw the US dollar turn in a mixed performance. Emerging market currencies and the dollar-bloc softened. Sterling was in this camp, losing about 1.2% against the dollar. On the other hand, the euro, Swiss franc, and the yen were firmer.
Market positioning, the unwinding of short funding currencies and long risk assets, seemed to account for the disparate price action. The pace of the slide in Chinese stocks and yuan, and the continued fall in oil prices rather than monetary policy considerations per se were the key drivers.
