Chinese stocks headed for their worst start to a year on record after manufacturing data showed evidence of a deepening economic slowdown and the yuan sank to its lowest in five years.
The Shanghai Composite Index declined 3.9 percent at 11:12 a.m. local time, the biggest first-day decline since trading began in 1990. The Hang Seng China Enterprises Index extended the largest annual drop among Asian benchmark gauges. The offshore yuan depreciated 0.6 percent.
China’s first economic reports of 2016 showed the official purchasing managers index weakened for a fifth straight month, the longest such streak since 2009, despite a series of interest-rate cuts and stepped up fiscal stimulus. While the Shanghai Composite ended higher for 2015, the H-share gauge in Hong Kong sank 19 percent on concern the deteriorating economy and weaker yuan will hurt the outlook for earnings.
‘The weaker PMI and the weaker yuan are the likely triggers,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “Fundamentals will see the market struggle, especially as I think the yuan in Shanghai and Hong Kong have a lot further to fall.”
A ban on selling by major stockholders on mainland exchanges is due to expire this week. Goldman Sachs Group Co. estimates the restriction affected investors with over 1.2 trillion yuan ($185 billion) of holdings and lifting the restriction may create a “liquidity risk,” according to a Dec. 3 note.
The Hang Seng Index fell 2.1 percent after last year’s 7.2 percent decline. Bank of East Asia Ltd. sank the most since July, while Li & Fund Ltd. tumbled 4.9 percent. The Hang Seng China Enterprises dropped 2.5 percent, extending 2015’s 19 percent plunge. The CSI 300 Index declined 3.4 percent.
“The overall market’s mood is still bearish after weak PMI readings,” said William Wong, head of sales trading at Shenwan Hongyuan Group Co. in Hong Kong. “Investors are also concerned that a removal of major shareholders’ selling ban would weigh on the indexes.”
The China Securities Regulatory Commission announced July 8 that investors with holdings exceeding 5 percent as well as corporate executives and directors would be prohibited from selling stakes for six months. The rule, which followed the suspension of initial public offerings and curbs on short-selling, was intended to stabilize capital markets amid an “unreasonable plunge” in share prices, according to the securities regulator.
Today’s declines may test a stock-market circuit breaker that was put in place effective Monday. Under the new mechanism, a move of 5 percent in the CSI 300 will trigger a 15-minute halt for stocks, options and index futures, while a move of 7 percent will close the market for the rest of the day.
The purchasing managers index edged up to 49.7 last month from a 3-year low of 49.6 in November, the National Bureau of Statistics said Friday. The non-manufacturing PMI, meanwhile, rose to 54.4, the highest since August 2014. The private Caixin China Manufacturing PMI index decreased to 48.2, down from a five-month high of 48.6 in November. Numbers below 50 indicate deterioration.
“It is certainly an inauspicious start, but it is not indicative of performance down the road,” said Bernard Aw, a strategist at IG Asia Pte in Singapore. “Markets are expecting more rate cuts to materialize, that could support the equities. Moreover, China still needs to adjust to the gradual withdrawal of rescue measures, where the scale of the volatility resulting from the acclimatisation is far from certain.”
While mainland authorities are lifting support measures for the stock market imposed at the height of a $5 trillion rout, Chinese stocks in Hong Kong are trading at some of the cheapest levels among global equities as foreign investors head for the exits. Dual-listed stocks are 40 percent more expensive on the mainland than in Hong Kong, according to the Hang Seng China AH Premium Index.
China will also scrap the upfront payment rule for IPOs from Jan. 1 as regulators seek to create a more level playing field for the country’s army of individual investors before the start of more substantial reforms. The statement last week by the China Securities Regulatory Commission confirmed plans first announced in November, when the regulator allowed new share sales to resume.
Also from this week, stock-index futures trading starts at 9:25 a.m., 10 minutes later than previously, while the afternoon session will end at 3 p.m., which is 15 minutes earlier.
Brent Crude Oil Extends Gain to $86.66 a Barrel Amid Tight Supply
Tight global oil supply pushed Brent crude oil, against which Nigeria oil is priced, to a multi-year high of $86.66 per barrel on Monday at 3:30 pm Nigerian time.
Oil price was lifted by rising fuel demand in the United States and tight global supply as economies recover from pandemic-induced slumps.
“The global energy supply crunch continues to show its teeth, as oil prices extend their upward march this week, a result of traders pricing in the ongoing rise in fuel demand – which amid limited supply response is depleting global stockpiles,” said Louise Dickson, senior oil markets analyst at Rystad Energy.
Goldman Sachs on the other hand is predicting a further increase in Brent crude oil to $90 a barrel, citing a strong rebound in global oil demand due to switching from gas to oil. This the bank estimated may contribute about 1 million barrels per day to global oil demand.
The investment bank said it expects oil demand to reach around 100 million barrels per day as consumption in Asia increases after the devastating effect of COVID-19.
“While not our base-case, such persistence would pose upside risk to our $90/bbl year-end Brent price forecast,” Goldman said in a research note dated Oct. 24.
Earlier this month, the Organization of the Petroleum Exporting Countries, Russia and their allies, known as OPEC+ agreed to continue increasing oil supply by 400,000 bpd a month until April 2022 despite calls for an increase in global oil supplies.
The decision bolstered the price of Brent crude oil above $84 per barrel and expected to push the price even further to $90 a barrel. Low global oil supply amid rising demand for crude oil will continue to support oil prices in the near term.
“Despite the recent power cuts and impacts to industrial activity in China, oil demand is likely instead supported by switching to diesel powered generators and diesel engines in LNG trucks, as well as by a ramp up in coal production,” Goldman Sachs stated.
U.S. and Ghana Inaugurate New $64.7 Million Energy Infrastructure Investment at Pokuase
U.S. Ambassador to Ghana Stephanie Sullivan joined the President of Ghana H.E. Nana Akufo-Addo and other Ghana government officials to formally inaugurate the Pokuase Bulk Supply Point (BSP) in Accra today. The U.S. Millennium Challenge Corporation (MCC) funded the $64.7 million (GH₵ 391.9 million) electrical infrastructure project under the Ghana Power Compact.
“The Pokuase Bulk Supply Point represents sustainable infrastructure investment by the United States with Ghana that will benefit hundreds of thousands of Ghanaians now and into the future,” remarked Ambassador Sullivan at the inaugural event. “It will help deliver more reliable power to the people, places, and businesses of Accra that drive increased economic activity benefitting families, businesses, and communities.”
This represents a flagship investment under the Millennium Challenge Corporation’s Ghana Power Compact. The Pokuase BSP will reduce outages in the power system, help stabilize voltages, and improve the quality and reliability of power supplied to the northern parts of the capital city of Accra. It will also reduce technical losses in the power transmission and distribution system, contributing to the financial viability of the Electricity Company of Ghana (ECG) and the Ghana Grid Company (GRIDCo) in the long term. The Pokuase BSP is now the largest-capacity BSP in Ghana at 580 megavolt amperes (MVA) and will directly benefit 350,000 utility customers.
The Government of Ghana implemented the project through the Millennium Development Authority (MiDA). MiDA formally handed over the new power substation to ECG and GRIDCo in today’s ceremony.
The Pokuase BSP is the first major construction project to be completed under the Ghana Power Compact. The $316 million compact is helping the Government of Ghana improve the power sector through investments that will provide more reliable and affordable electricity to Ghana’s businesses and households. The compact is also funding a BSP at Kasoa and two primary substations at Kanda and Legon, in addition to other power sector investments, energy efficiency programs, and women’s empowerment programs within the power sector. The compact program will officially close on June 6, 2022.
Oil Falls Slightly as China Steps in to Curb Rising Coal Prices
Global oil prices moderated slightly on Wednesday following the Chinese government’s decision to curb high coal prices and ensure coal mines function at maximum capacity.
Brent crude, against which Nigerian oil is priced, dropped to $83.98 per barrel at 11:00 am Nigerian time. While the U.S. West Texas Intermediate (WTI) crude fell by 80 cents or 1 percent to $81.20 a barrel.
“China is planning to take steps to combat the steep rises in the domestic coal market … which could put considerable pressure on the coal price there and reverse the fuel switch to oil,” Commerzbank said.
Prices for Chinese coal and other commodities slumped in early trade, which in turn pulled oil down from an uptick earlier in the day.
China’s National Development and Reform Commission said on Tuesday it would bring coal prices back to a reasonable range and crack down on any irregularities that disturb market order or malicious speculation on thermal coal futures. read more
Oil markets in general remain supported on the back of a global coal and gas crunch, which has driven a switch to diesel and fuel oil for power generation.
But the market on Wednesday was also pressured by data from the American Petroleum Institute industry group which showed U.S. crude stocks rose by 3.3 million barrels for the week ended Oct. 15, according to market sources.
That was well above nine analysts’ forecasts for a rise of 1.9 million barrels in crude stocks, in a Reuters poll.
However, U.S. gasoline and distillate inventories, which include diesel, heating oil and jet fuel, fell much more than analysts had expected, pointing to strong demand.
Data from the U.S. Energy Information Administration is due later on Wednesday.
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