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Stocks Extend Rout, Oil Slides on China as Soros Warns of Crisis

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Global markets shuddered as turmoil emanating from China spread around the world and billionaire George Soros warned of a crisis.

Chinese shares fell 7 percent within a half hour of opening, triggering a full-day trading halt, after the central bank cut the yuan’s reference rate by the most since August. Other equity markets tumbled, with European shares falling the most since September and U.S. futures indicating a lower open. Commodities weren’t spared as crude headed for its lowest settlement in 12 years. Haven assets gained, with Treasuries rising for a sixth day, the yen reaching a four-month high and gold surging.

“China has a major adjustment problem,” Soros said Thursday at an economic forum in Colombo, Sri Lanka. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”

Contagion from China helped wipe $2.5 trillion off the value of global equities in the first six days of this year as the nation’s tolerance for a weaker currency is viewed as evidence that policy makers are struggling to revive an economy that’s the world’s biggest user of energy, metals and grains. The World Bank cut its global growth forecasts for this year and next as China’s slowdown prolongs a commodity slump and contractions endure in Brazil and Russia. Chancellor of the Exchequer George Osborne plans to highlight a “dangerous cocktail” of global threats faces the British economy this year.

China

The Hang Seng China Enterprises gauge of mainland shares listed in Hong Kong tumbled 4.2 percent, its lowest close since October 2011. The Hang Seng Index dropped 3.1 percent.

The Shanghai Composite Index tumbled 7.3 percent before trading was suspended. New circuit breakers, which kicked in on Monday, have been criticized by analysts for exacerbating declines as investors scramble to exit positions before getting locked in by the halts.

After the stoppage, the securities regulator announced rules to limit selling by major shareholders when a ban expires this week. The watchdog also held an unscheduled meeting on the tumbling stock market without coming to a decision on policy action, according to a person familiar with the discussions.

“The Chinese yuan is smack bang at the heart of concerns,” Chris Weston, chief market strategist in Melbourne at IG Ltd. “For risk assets to stabilize and sentiment to turn around, we are going to need a stable or even positive move in the Chinese currency. It’s clear that the market is becoming increasingly concerned by the global inflation outlook.”

The offshore yuan swung from a 0.3 percent gain to a 0.7 percent loss and back in the space of about 30 minutes in early activity in Hong Kong’s freely-traded market. It was subsequently 0.4 percent higher versus the greenback, while the onshore rate weakened 0.6 percent.

“We saw aggressive intervention in the offshore yuan market,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “We don’t really understand the rationale behind the market movements in the past few days. Obviously, these movements have reminded us of the market rout last year.”

The central bank is considering new measures to prevent high exchange-rate volatility in the short term, according to people familiar with the matter.

China’s foreign-exchange reserves slid more in December than forecast, capping their first-ever annual decline, as authorities sought to prop up a weakening yuan.

Stocks

The Stoxx Europe 600 Index slid 3.2 percent at 1:07 p.m. in London, as all but 10 stocks fell. Commodity producers and carmakers, among those with the most sales exposure to China, led declines.

Anglo American Plc tumbled 9.6 percent and ArcelorMittal slid 6.1 percent, dragging a gauge of miners to its lowest level since 2009. A measure of energy producers also fell to a near six-year low, with Royal Dutch Shell Plc dropping 6.2 percent, the most since August.

Daimler AG, BMW AG and Volkswagen AG each lost at least 4.5 percent, helping pull Germany’s benchmark DAX Index below 10,000 for the first time since October.

The VStoxx Index measuring volatility expectations in euro-area shares jumped 17 percent, heading for its biggest weekly advance since April.

Futures on the Standard & Poor’s 500 Index lost 2.2 percent, after the U.S. benchmark slipped Wednesday to its lowest level in three months.

The MSCI Asia Pacific Index retreated 2.1 percent. Benchmark stock indexes in Australia, Japan, Singapore and Thailand all lost more than 2 percent.

Currencies

The yen, which has been the best-performing major currency so far this year amid the demand for safe-haven assets, rose as much as 1 percent to its strongest level since August versus the dollar.

The pound fell to the weakest level since June 2010, touching $1.4555. The U.K. currency slid 1 percent to 74.46 pence per euro. It has fallen every day this week against the dollar. Disappointing manufacturing and services data added to the view that the Bank of England will have to keep its benchmark interest rate lower for longer.

The Aussie tumbled 0.8 percent to 70.13 U.S. cents, and touched 70.09, its lowest since Oct. 2. It fell more than 3 percent through Wednesday, its worst start to any year since currency controls were scrapped in December 1983, according to data compiled by Bloomberg.

Commodities

The Bloomberg Commodity Index dropped 0.7 percent, headed for its lowest close since 1999.

West Texas Intermediate crude slid 3.3 percent to $32.86 a barrel, poised for the lowest settlement since February 2004. Crude supplies at Cushing, Oklahoma, the delivery point for U.S. crude, climbed to an all-time high, government data showed Wednesday. Brent oil will slump to $30 in the next 10 days, according Nomura Holdings Inc., while UBS Group AG sees an oversupply pushing prices even lower.

Copper retreated 2.6 percent in London to the lowest since Nov. 24 and zinc slumped 3.6 percent. Cocoa for March delivery fell for a fifth day to an eight-month low on ICE Futures U.S. in New York. Gold rose as much as 0.8 percent to a two-month high of $1,102.85 an ounce.

Bonds

Yields on 10-year Treasury notes fell one basis points to 2.16 percent, after earlier touching the lowest since October. Japanese government bond futures advanced to a record high after 30-year notes were auctioned at a higher price than dealers forecast. South Korea’s 10-year yield fell to a record low as the weakening yuan dimmed the outlook for exports to China and North Korea’s fourth nuclear test, conducted on Wednesday, spurred demand for safer assets.

Germany’s 10-year break-even rate, a gauge of the market’s outlook for inflation, tumbled to the lowest level since February amid concerns that the rout in commodity markets would subdue price-growth.

The cost of insuring investment-grade corporate debt climbed to the highest since Oct. 6. The Markit iTraxx Europe Index of credit-default swaps on highly rated companies rose four basis points to 85 basis points. The Markit iTraxx Europe Crossover Index of default swaps on junk-rated companies jumped 16 basis points to 351 basis points, the highest since Dec. 15.

Emerging Markets

Energy producers led losses in developing-nation stocks, driving the MSCI Emerging Markets Index down 2.7 percent. Benchmark gauges in South Africa, Thailand, the Philippines and Abu Dhabi slid more than 2.5 percent and those for Saudi Arabia, Dubai and Qatar tumbled at least 3 percent. Russian markets were closed for a holiday.

A gauge tracking 20 emerging-market currencies dropped for a fifth day, headed for its longest losing streak since October. The rand in South Africa, which counts China as its biggest trading partner, tumbled 1.5 percent to a record low. Russia’s ruble slid 1.1 percent in offshore trading while Mexico’s peso and Brazil’s real slid at least 0.6 percent.

Bloomberg

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Markets

Markets Today – Cautiously Higher, China, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

European stock markets moved cautiously higher on Monday as investors were tempted back in after a turbulent start to the year.

It’s been a relatively quiet start to the week, with the US bank holiday naturally weighing on activity. With that in mind, I don’t think we can read too much into today’s advances, especially as they’re occurring alongside rising yields which doesn’t seem particularly sustainable at a time of such anxiety in the markets.

It will be interesting to see if investors are tempted back in now that earnings season is underway. The emergence of omicron may mean that many companies don’t enjoy the kind of performance that was expected before but that doesn’t mean there won’t be plenty of positives to take away.

Of course, there are areas that will naturally chip away at that enthusiasm. Whether that’s margins being squeezed, prices increased or staffing costs, for example, there’ll be plenty for investors to get their heads around as they contend with sky-high valuations and a tricky economy this year.

PBOC cuts rates despite strong growth in 2021

A mixed bag of data overnight from China, where GDP growth exceeded expectations but retail sales fell short and the unemployment rate ticked higher. While the economy is still performing well after far exceeding its growth targets for 2021, many challenges remain, not least the crackdown on the property market that has led to firms defaulting on coupon payments and being forced into negotiations with bondholders.

This explains the PBOC decision overnight to cut interest rates and further easing is expected to follow as the central bank looks to support the economy through a turbulent period.

Oil rally continues as output continues to fall short

Oil prices are edging higher again at the start of the week as it continues its remarkable run since bottoming in early December. It’s up more than 30% over that time and there still appears to be momentum in the move. Kazakhstan has seen its output return to pre-unrest levels but that’s done little to slow the rally in recent sessions.

Ultimately it comes down to the ability of OPEC+ to deliver the 400,000 barrel per day increase that it’s vowed to do each month. The evidence suggests it’s not that straightforward and the group is missing the targets by a large margin after a period of underinvestment and outages. That should continue to be supportive for oil and increase talk of triple-figure prices.

Can gold break key resistance?

Gold is marginally higher on the day after pulling back again late last week. The yellow metal has repeatedly struggled at $1,833 and it would appear it’s having the same struggles this time around as well. It did finally break through here in November but it didn’t last and it seems the psychological barrier is as firm as ever.

That said, it’s impossible to ignore gold at the moment as it continues to rally despite more and more rate hikes being priced in around the world and yields rising in tandem. There could be an argument that we’re seeing safe haven or inflation hedge moves due to the current environment which could become more clear over the coming weeks.

Another run at $40,000?

Bitcoin is down a little over 2% at the start of the week and continues to look vulnerable having failed to bounce back strongly off the recent lows. It appeared to be gathering some upside momentum at times last week but it quickly ran into resistance just shy of $45,000 where it had previously seen support. All eyes are now on $40,000 and whether we’re going to see another run at that major support level.

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Oil Extends Gain Above $86 Per Barrel Amid Tight Supply

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Oil

Brent crude oil extended gains above $86.16 per barrel on Monday as global oil investors are projecting that supply will remain tight despite the surge in Libya crude oil production. The increase, they bet would be offset by restraint from top crude oil producers.

Frantic oil buying, driven by supply outages and signs the Omicron coronavirus variant will not be as disruptive to fuel demand as previously feared, has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained for a while longer, traders said.

“The bullish sentiment is continuing as (producer group) OPEC+ is not providing enough supply to meet strong global demand,” said Fujitomi Securities analyst Toshitaka Tazawa.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, together known as OPEC+, are gradually relaxing output cuts implemented when demand collapsed in 2020.

But many smaller producers cannot raise supply and others have been wary of pumping too much oil in case of renewed COVID-19 setbacks.

Meanwhile, Libya’s total oil output is back to 1.2 million barrels per day (bpd), according to National Oil Corp. Libyan output was about 900,000 bpd last week owing to a blockade of western oilfields.

“Libya’s oil production had dropped to a good 700,000 bpd at the start of the year, which had played its part in the price rise,” said Commerzbank analyst Carsten Fritsch.

Concerns over supply constraints outweighed the news of China’s possible oil release from reserves, said Fujitomi’s Tazawa.

Sources told Reuters that China plans to release oil reserves around the Lunar New Year holidays between Jan. 31 and Feb. 6 as part of a plan coordinated by the United States to reduce global prices.

Saudi Energy Minister Prince Abdulaziz bin Salman said on Monday that it is the prerogative of the U.S. government whether to release supply from strategic petroleum reserves.

Festering geopolitical threats to supply are also supporting bullish sentiment, analysts said.

U.S. officials voiced fears on Friday that Russia was preparing to attack Ukraine if diplomacy failed. Russia, which has amassed 100,000 troops on Ukraine’s border, released pictures of its forces on the move.

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Markets Today – Inflation, Jobless Claims, Boris Blunder, Oil, Gold, Bitcoin

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a rollercoaster start to the year and as we head into earnings season, it’s hard to say exactly where investors stand.

Blocking out the January noise is one thing but it’s made far more complicated by omicron, inflation, and the rapid evolution of monetary policy. Yesterday’s reaction to the inflation data was a case in point. The data mostly exceeded expectations, albeit marginally, while headline inflation was a near 40-year high of 7%. And yet the response was broadly positive.

I get that traders were perhaps fearing the worst and, as I’ve referenced before, it does feel like markets are at peak fear on US monetary policy which could make relief rallies more likely. But there is also underlying anxiety in the markets that could make for some volatile price action for the foreseeable future.

Perhaps earnings season will bring some welcome normality to the markets after a period of fear, relief, and speculation. The fourth quarter is expected to have been another strong quarter, although the emergence of omicron will likely have had an impact during the critical holiday period for many companies. Of course, as we’ve seen throughout the pandemic, that will likely have been to the benefit of others.

And while earnings season will provide a distraction, it is happening against an uncertain backdrop for interest rates and inflation which will keep investors on their toes. It does seem that investors are on the edge of what they will tolerate and it won’t take much to push them over the edge. Which will be fine if we are near the peak of inflation, as many expect.

The data today looks a mixed bag on the face of it, with jobless claims coming in a little higher than expected, which may be down to seasonal adjustments. The overall trend remains positive and continues to point to a tight labor market. The PPI data on the other hand will be welcomed, with the headline number slipping to 0.2% month on month. Perhaps a sign of supply-side pressures finally starting to abate which will come as a relief after inflation hit a near-40 year high last month.

Sterling solid as pressure mounts on Boris

It seems impossible to ignore the political soap opera currently taking place in the UK, with Prime Minister Boris Johnson once again in the public firing line after finally admitting to attending an office party in May 2020.

In other circumstances, uncertainty around the top job in the country could bring pressure in the markets but the pound is performing very well. Perhaps that’s a reflection of the controversy that forever surrounds Boris, and we’re all therefore numb to it, or a sign of the environment we’re in that the PM being a resignation risk is further down the list when compared with inflation, interest rates, omicron, energy prices etc.

Oil remains bullish near highs

Oil prices are easing again today after moving back towards seven-year highs in recent weeks. It was given an additional bump yesterday following the release of the EIA data which showed a larger draw than expected. But with crude already trading near its peak, it maybe didn’t carry the same momentum it otherwise would.

The fundamentals continue to look bullish for gold. Temporary disruptions in Kazakhstan and Libya are close to being resolved, with the latter taking a little longer to get fully back online. But OPEC being unable to hit output targets at a time when demand remains strong is ultimately keeping prices elevated and will continue to do so.

A big test for gold

Gold is off a little today but the price remains elevated with key resistance in sight. The yellow metal has remained well supported in recent weeks even as yields around the world continue to rise in anticipation of aggressive tightening from central banks.

It could be argued that the bullish case for gold is its reputation as an inflation hedge, especially given central banks’ recent record for recognizing how severe the situation is. But with inflation likely nearing its peak, that may not last. That said, fear around Fed tightening may also be peaking which could support gold in the short-term and a break through $1,833 could signal further upside to come.

Can bitcoin break key resistance?

Bitcoin is enjoying some relief along with other risk assets and has recaptured $44,000, only a few days after briefly dipping below $40,000. That swift 10% rebound is nothing by bitcoin standards and if it can break $45,500, we could see another sharp move higher as belief starts to grow that the worst of the rout is behind it. It looks like a fragile rebound at the moment but a break of that resistance could change that.

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