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Mid-morning update: China state intervention putting out (and starting) fires

Christmas shopping

Christmas shopping

UK and European equities were in the green Tuesday morning thanks to a rise in the value of the Chinese yuan, the devaluation of which has been rattling markets in the New Year. A rebound off fresh 12-year lows in the price of oil has added to the upside in stock markets after a series of investment banks lowered forecasts to as low as $10 per barrel.

The PBOC fixed the onshore yuan rate higher but traders took the bounce as an opportunity to sell the offshore rate forcing suspected state-backed bank buying to bring the onshore-offshore spread back into line. The unintended consequence was another giant spike in offshore borrowing rates. The risk is that more Chinese state intervention means more market fires get started than put out.

Brent crude oil futures came just shy of $30 per barrel. The investment bank forecast cuts come off the back of concerns surrounding the demand for oil from China as its economy slows coupled with a risk that a rise in the dollar will further devalue dollar-denominated commodities. Oil markets have become increasingly volatile. Traders are still pushing oil prices around by as much as $3 a day just like when the price was a $100 per barrel but with prices now at $30 per barrel, what was a 3% move has become a 10% rollercoaster.

Retailers topped the FTSE 100 with Tesco, Sainsbury’s, Burberry, Dixons Carphone and M&S all on the rise thanks to positive holiday sales results from Morrisons and Debenhams.

The apparent consumption splurge over Christmas was marred by ongoing weakness in the UK’s manufacturing sector which sent sterling to a new five-and-a-half year low against the dollar. UK industrial production unexpectedly declined by -0.7% m/m in December when flat growth was expected after a rise of just 0.1% the previous month.

US stocks look set for a higher open following mixed earnings from Alcoa reported overnight as global sentiment improved following apparent Chinese state intervention in currency and stock markets.

 

USA pre-opening levels

S&P 500: 7 points higher at 1,930

Dow Jones: 52 points higher at 16,450

Nasdaq 100: 19 points higher at 4,302

 

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Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.