Stock markets around the world have been selling off again overnight, dragged down by another big drop in mainland China markets that saw Shanghai close limit down for the day (7%) within a half hour of trading. Later in the day, Chinese securities authorities announced new rules limiting sales by large shareholders but it remains to be seen if this will be enough to shore up support.
It appears that rather than stopping selling pressure completely, the bans on selling by large shareholders and short sellers undertaken last summer seem to have only postponed the inevitable. As selling bans come off over the next few weeks and months we could see more volatility in Chinese markets as the big gains and drops of 2015 continue to be unwound.
It’s important for traders to note that just as last spring’s big rally was not supported by the Chinese economy, the big unravelling hasn’t had a major impact on the economy yet either. China’s economy has been struggling but not enough to justify two 7% drops in four days. Eventually things should settle out, but ongoing restrictions on trading mean it could drag on for a while so we may see higher volatility continue for some time.
CNH appears to have stabilize having and inside day while Chinese authorities marked down CNY to close the gap between the onshore and offshore markets. JPY continues to rally along with gold as capital heads for defensive havens. Concerns that the selloff could impact China’s economy and resource demand continue to impact commodities with copper and crude oil selling off overnight and resource currencies, particularly China or oil sensitive markets like AUD, RUB and CAD.
Stock markets in Europe and the US continue to get hit by the shockwaves of the China selloff, with major indices on both sides of the Atlantic falling 2.5-3.5% this morning. The World Bank cutting its GDP growth forecast for 2016 hasn’t helped sentiment either. Interestingly, this comes at a time when economic reports for Europe have been pretty good on balance while the US has been mixed. EUR and nearby currencies like CHF and SEK find themselves on the rebound this morning suggesting that currency markets have started to recognize the fundamental improvement.
Macy's (N:M) profit warning overnight suggests that it was likely a difficult holiday season for traditional retailers at least. Something interesting, however, is that even with the cover of high global market turmoil (a great time for companies to sneak through negative news) there haven’t been very many profit warnings.
This means things could change completely later in the month when focus shifts back toward corporate news and earnings reports. Results from vintner Constellation Brands (N:STZ) look encouraging and over the next few weeks we should be able to figure out if this is from people celebrating success or drowning their sorrows.
Overall, it seems like we might be getting close to a near term washout but it’s too early to call a bottom as we could see more volatility until Chinese markets sort themselves out. The potential for high intraday volatility may continue to create short-term opportunities for nimble and active traders.
For today, we could see more action in energy markets, particularly natural gas around this week’s storage reports. CAD could be active with Bank of Canada governor Poloz speaking this morning. Although overshadowed by overseas trends, there are two Fed speakers in the US today and we could see some positioning ahead of tomorrow’s nonfarm payrolls report.