Happy New Chinese Stock Markets Rout: 2016 Volatility Kicks Off

The Chinese stock market hit its circuit breakers on the first trading day of 2016 after weaker than expected manufacturing

The Chinese stock market has marked its worst ever start to the new year as stocks slumped across the board. Trading in the country’s $7 trillion market for equities, futures and options hit the 7 per cent threshold which activates circuit breakers on the market at about 1:34 P.M. local time, due to a seemingly unending selloff.

With the world’s second largest market starting the year in the doldrums, currency markets have taken their cue from the Japanese yen benefiting across the board from safe haven demand. The currency has risen over 1 per cent against the U.S. dollar, while the antipodean currencies have declined against the U.S. dollar in a similar fashion, as has the loonie.

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Looking at other asset classes, volatility has spread, with the German Dax Index shedding more than 3 percent an hour into the trading day, while the Japanese Nikkei index closed the first trading session of 2016 finishing by a touch lower than that.

U.S. equities futures are trading lower by more than 2 per cent, continuing the decline that we saw in the final trading hours of 2015.

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Commenting on the excessive moves, Currency Strategist at DailyFX, Ilya Spivak, said: “The Australian, Canadian and New Zealand Dollars plunged while the safety-linked Japanese Yen outperformed as risk aversion swept the financial markets at the open of the new year. Indeed, the moves played out alongside sharp declines across Asian stock exchanges.”

“A bias toward risk aversion in the first act of 2016 seems to make sense. The Fed’s aggressive easing effort over the past seven years slashed returns on safer assets and encouraged a reach for yield outward along the risk spectrum,” he elaborated.

Strategists from Commerzbank have elaborated on the state of play of the USD/CNH, which is rallying strongly this morning, with the U.S. dollar hitting a new four year high: “China’s central bank will intervene to cap the upside in the USD/CNH in order to prevent a fast depreciation of the Chinese yuan.”

With short-term borrowing costs seen rising as the FOMC begins to withdraw stimulus, a reversal of this dynamic is likely to drive portfolio adjustment, sending sentiment-linked assets including stocks and higher-yielding currencies downward.

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