Asian markets opened the week sharply lower as the meltdown in China stock market accelerated. At the time of writing, the Shanghai Composite is trading down -300 pts, or -8.5% and is pressing 3200. That's well below the 3500 level that markets expected the government to defend. HK HSI followed and is down over -1000 pts, or -4.5%. Nikkei is also down over -600 pts or -3%. The Chinese State Council announced over the weekend that the USD 550b pensions funds are now allowed to invest as much as 30% of the net assets by the end of 2014. However such move was seen as inadequate to halt the market crash. There were expectations that China would opt for another cut in required reserve ratio (RRR), or any larger measures. The weakness in stocks today was also a reaction to the steep fall in US on Friday, which ended the worst week in four years.
Some economists pointed to the persistent selloff as a result of worsening slowdown in China. Nonetheless, some also saw the disinflation and deflation pressures and tightening in global monetary conditions as other factors. Meanwhile, the crisis in China stock market could eventually force the country to devalue the yuan again, even in more aggressive pace. And that would trigger worsening in currency war among emerging markets.
In the currency markets, Euro, Swiss Franc and yen remains the strongest major currency on this risk averse backdrop. Commodity currencies are worse hit. Crude oil extended recent slide and reached as low as 39.0. Gold also dropped slightly and is back below 1160. Meanwhile, the Bloomberg Commodity Index dropped to the lowest level since 1999. Dollar and Sterling are also weak as markets pare back expectation of rate hike. In particular, there is very little chance that Fed will raise interest rate in September based on the current situation.
The economic calendar is empty today and is relatively light in the week ahead except Friday. While some important data will be released, the main focus will be on the Jackson Hole Symposium. Fed vice Stanley Fischer could finally tip that Fed won't hike in September. Here are some highlights for the week:
- Tuesday: German IFO, GDP final; US house price indices, consumer confidence, new home sales
- Wednesday: New Zealand trade balance; Swiss UBS consumption indicator. UK BBA mortgage approvals; US durable goods
- Thursday: Eurozone M3; US GDP revision, jobless claims, pending home sales
- Friday: Japan CPI, retail sales, unemployment rate, household spending; Swiss GDP; German CPI;UK GDP revision; US personal income and spending.