Market volatility shows no signs of letting up

Friday, January 15, 2016

The upbeat mood on Wall Street failed to carry over to the Asian session as benchmark equity indices across the region ended the week on the back foot, capping what has been a volatile second week of the year. Chinese mainland stocks led the move lower while Japanese indices faced renewed pressure on a stronger yen. Market volatility remains high and while many commentators are calling a bear market in equities it seems the selling pressure that has dominated over the past two weeks has predominately been spurred by investors adopting a wait-and-see approach at the start of the year. It seems investors have gotten used to the market cues and forward guidance of central banks and we believe markets will calm once the dust settles over the coming weeks and additional information from policymakers is provided.

A choppy week for the yuan as the offshore exchange rate gave back more of the week’s earlier gains with moves overnight pushing the Chinese currency towards 6.6160 against the dollar. After strengthening throughout the first half of the week on prolific PBOC intervention, gaining 1.7% against the dollar and trading back around 6.5600, the yuan reversed direction yesterday and traded back above 6.6000. It seems the Chinese central bank is going to considerable lengths to shore up the currency, with data for December showing it sold a record amount of foreign currency as it accelerated its yuan purchases. The central bank’s foreign exchange assets fell by 24.85 trillion yuan ($107bn) in December and while we understand Beijing’s rationale behind the supportive move, the central bank’s efforts may be in vain. On the one hand it wishes to allow a freer float of the currency indicated by the yuan’s inclusion in the exclusive IMF SDR basket, but on the other hand it has made considerable efforts to influence the currency, time will tell if attempts to shore up the currency are merely an expensive short term fix.   

Another engaging day in terms of macro data, not that the majority seem to be paying any attention, with US data dominating the day’s releases. Of note, we have retail sales, PPI and industrial production data for December which will provide an indication of US economic performance after the Fed lifted interest rates while the Empire manufacturing index and University of Michigan sentiment index will provide an insight into how the US economy started the year.

Chinese yuan swings back above 6.6160

CNH Curncy Offshore Deliverable 2016 01 15 07 45 13

Events for today

0930

UK

Nov

Construction Output

1330

US

Dec

Retail Sales

1330

US

Dec

PPI

1330

US

Jan

Empire Manufacturing

1415

US

Dec

Industrial Production

1500

US

Jan

University of Michigan Sentiment

Topics: Equities, PBOC, CNH
More from: Kash Kamal