The Chinese central bank guided the yuan to its weakest point in three weeks, and markets reacted swiftly over concerns about how the country’s economy is actually doing.
Bloomberg News had details on why the yuan was dropping so rapidly:
Chinese stock-index futures in Hong Kong climbed and the yuan plunged after the central bank cut the amount of cash the nation’s lenders must hold as reserves, boosting efforts to support the world’s second-largest economy.
The Hang Seng China Enterprises Index futures rose 0.7 percent as of 6:37 p.m. in Hong Kong, while the yuan dropped 0.2 percent against the dollar in offshore trading. China’s one-year non-deliverable interest-rate swaps declined five basis points, the most in seven weeks, to 2.16 percent, data compiled by Bloomberg show.
The move came after the Shanghai Composite Index sank to the lowest level since 2014, with Reorient Financial Markets Ltd. saying that investors were disappointed by a lack of specific measures to boost growth during the Group of 20 meeting in Shanghai last week. Policy makers are trying to walk a fine line between boosting growth and preventing capital outflows that have spurred bets on yuan depreciation.
“This shows the PBOC still has room to stimulate markets and the economy if necessary,” said Ryan Lam, Hong Kong-based head of research at Shanghai Commercial Bank Ltd. “One message they want to send is that they have more tools than most other central banks. It’s a positive move and gives reassurance to the investor, at least in the short term.”
Riva Gold of The Wall Street Journal explained how concerns over China are causing stocks globally to fall short:
Monday’s losses followed a slightly weaker close for Wall Street Friday, but U.S. stocks still posted their second consecutive week of gains, fueled by a rise in crude oil prices.
That trend continued early Monday, with Brent crude oil last up 0.7% at $35.33 a barrel.
With U.S. stocks on track to end the month higher, investors are now questioning whether recent gains mark a turnaround for stocks, or merely a short-lived relief rally following weeks of losses.
“Primarily, I want to see if consumers in the U.S., China and Europe are going to remain healthy,” said Carmel Wellso, portfolio manager of the Janus International Equity Fund, noting she will also be watching global trade figures closely.
“We think the U.S. economy is stronger than originally expected,” Ms. Wellso said. She has been selectively adding to her portfolio of U.S. equities.
Data last week showed the fourth-quarter U.S. economic slowdown was less severe than previously estimated, while inflation has started to tick up from low levels, allaying some concerns about the prospect of a U.S. recession.
“We had a big scare, but I don’t think we’re sitting in a bad place,” said Jim Tierney, who manages a U.S. growth portfolio at AllianceBernstein.
Still, many investors remain cautious as concerns persist over low commodities prices, turmoil in emerging markets and lackluster earnings.
Kelvin Chan of the Associated Press broke down how each sector of the market was doing Monday:
KEEPING SCORE: European benchmarks mostly fell in early trading, with Germany’s DAX tumbling 1.5 percent to 9,369.00 and France’s CAC 40 sliding 1.1 percent to 4,266.71. Britain’s FTSE 100 rose 0.5 percent to 6,055.91. U.S. stocks were poised to open lower, with Dow futures shedding 0.6 percent to 16,503.00 and broader S&P 500 futures down 0.6 percent to 1,931.70.
SHANGHAI SUMMIT: Finance ministers and central bankers from the Group of 20 rich and developing countries promised at their meeting Saturday in Shanghai to use “all tools” at their disposal to bolster weak global growth, which is at its lowest level in two years. They also vowed not devalue their currencies to boost exports. They declared that the global economy is healthy, but acknowledged they need to do more to boost growth, without announcing any joint plan of action.
MARKET INSIGHT: “Following the optimism from traders on Friday ahead of the G-20 Summit, it looks like a case of the Monday morning blues after the influential group of ministers and bankers failed to come up with any concrete measures to boost growth,” said Stephen Innes, senior foreign exchange trader at OANDA.
YUAN JITTERS: Chinese authorities guided the tightly controlled yuan sharply lower on Monday morning, in a move that sent the country’s stock markets on another wild downward swing, taking the Shanghai benchmark down as much as 4.4 percent in morning trading. Central bank officials weakened the yuan by more than 114 basis points to 6.5452 to the dollar in their daily fix. Investors worry that sharp falls in China’s currency signal Beijing’s willingness to devalue the yuan further to prevent growth from slowing more than expected.
GLOBAL OUTLOOK: Investor sentiment is also cautious ahead of the release of a slew of economic data this week. Surveys of purchasing managers in the manufacturing and service sectors are due Tuesday for China, the U.S. and other countries in Asia and Europe.
ASIAN SCORECARD: Japan’s benchmark lost 1 percent to close at 16,026.76 while South Korea’s Kospi dipped 0.2 percent to end at 1,916.66. Hong Kong’s Hang Seng slid 1.3 percent to 19,111.93 while the Shanghai Composite Index tumbled 2.9 percent to 2,687.98 after the yuan’s decline. Australia’s S&P/ASX 200 was almost flat at 4947.90. Benchmarks in southeast Asia were mixed.
ENERGY: Benchmark U.S. crude oil fell 20 cents to $32.58 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 29 cents, or 1 percent, to settle at $32.78 a barrel on Friday. Brent crude, the global benchmark, rose 25 cents to $35.19.
CURRENCIES: The dollar fell to 112.89 yen from 113.98 yen in late trading Friday. The euro slipped to $1.0918 from $1.0932.
