Europe Stock markets are falling apart at the seams. Since the end of the financial crisis these kinds of sell-offs have been met with eager buying on the dip. There was one point today when there just seemed to be no buyers and markets just went into freefall. The FTSE 100, German DAX and Euro Stoxx 50 were all, at one point, down over 5%. However, in a symptom of low liquidity summer trading markets did eventually bounce massively off the lows once US markets opened. The catalyst for the sell-off hasn’t changed; it’s that China’s slowdown is going to hit global growth at a time when stock markets are near record highs. They are a lot further from record highs today though. The FTSE 100 hit its lowest level since 2012. China-sensitive mining stocks led the declines with shares of Glencore down as much as 12% but it was a bloodbath across the board. The only hope for China to avert its slowdown is with drastic government intervention to stimulate the economy. The disastrous Chinese manufacturing data released on Friday that caused Shanghai markets to fall off a cliff was a cue for authorities to loosen monetary policy. They didn’t; now markets are wondering why. One reason is that they are planning to act more through exchange rates. After multiple interest rate and reserve ratio cuts failed to stimulate the economy, the PBOC has been forced to step on other country’s toes and devalue their currency to compete on exports. Possibly triggering a currency war in the process. There are a multitude of reasons the panic in China is spreading to the rest of the world, but at the heart of it could be that investors are starting to realise central banks are not infallible. The PBOC has spectacularly failed to stimulate the Chinese economy, Europe’s whole recovery is based on a lower euro which was just undermined by the yuan devaluation and the US is experiencing its slowest post-recession recovery on record, despite huge stimulus. US Dow Jones, S&P 500 and Nasdaq futures markets all went limit down before the open of US markets for their worst start since the financial crisis. At one point the Dow Jones was set to open down by 1000 points before actually opening 900 points lower. The NYSE instituted ‘rule 48’ to help stem volatility concerns by giving designated market makers the option not to show prices before the open. In a sign of how strained the volatility became, the VIX index rose by 78% today to its highest level since 2011. High beta tech stocks were living up to their name; shares of Twitter and Netflix opened down -8% and -12% respectively. It’s possible that was a massive shakeout at the bottom of a downturn in the market, but with the Dow Jones moving up and down by hundreds of points within minutes, many investors are likely to think twice about holding on for another leg higher. FX Currency markets went mad There were extreme movement’s across several major currency pairs with the dollar getting stretched both directions. The pound, euro and yen rallied whilst commodity currencies got trounced. Bearish sentiment on the euro has evaporated with short-sellers covering losses after the currency reached its highest since January. EUR/USD touched 1.17. The Japanese yen rallied as investors flew into the safe haven of yen and US treasuries and the Nikkei tanked. It was tantamount to a flash crash in USD/JPY, which was at one point down over 4% and almost 600 pips. In a sign of the extent of the sell-off; the bounce off the lows was over 250 pips. The Australian and New Zealand dollars both took a kicking because of trade ties with China. Commodities Despite the implication of an emergency OPEC meeting from Iran’s oil minister, crude oil prices nosedived to new multi-year lows. Saudi Arabia has just raised money on debt markets for the first time in years, so they are definitely feeling the heat from the drop in the price of oil. But they won’t be the one to budge. It will be the other OPEC members who don’t have the financial clout of Saudi Arabia that will be pushing for a production cut. A lot of these countries need $100 per barrel to sustain current budgets so right now they are eating into reserves. If they were to cut on the budgets then we may have an “Arab Winter” uprising. There could be an emergency meeting but OPEC caving in with a production cut seems unlikely. OPEC would lose all credibility if they cut now and the policy probably wouldn’t work in the long run because they aren’t the swing producer anymore. By November, if oil prices are still at these levels then desperation may take over and lead to a cut, simply because they would feel they don’t have a choice. US oil producers are highly leveraged but with low interest rates they can keep it up without going bankrupt. With the current turmoil in financial markets and weak global growth outlook it doesn’t look like the Fed are going to raise rates in a hurry. Gold was acting as a safe-haven again on Monday, but gains were limited as assets across the board faced liquidation. 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.
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