China’s Financial Markets Will Reopen to a Barrage of Selling
(Bloomberg) -- Every other market has already reacted to the deadly virus threatening China’s economy. Soon it will be China’s turn, and it’s likely to be brutal.
Stocks and commodities will almost certainly sink when financial markets reopen Monday for the first time since Jan. 23, while bond yields will drop. For equities, the declines are likely to be exacerbated by the amount of leverage in the market -- near the highest in 11 months. That could create a downward spiral where steep losses become steeper as traders face margin calls.
As an example of how extreme selling can be: In May the Shanghai equity benchmark fell almost 6% when it resumed trading following a holiday break on negative trade-war news.
Adding to the nervousness is what’s set to be the largest liquidity event of its kind in China, with banks due to repay more than 1 trillion yuan ($143 billion) in short-term funds. The daily yuan reference rate will also be closely watched after the currency weakened past 7 per dollar in offshore trading for the first time this year.
China’s Yuan Tumble Past 7 May See Less Disruption This Time
The total death toll has risen to 213 while confirmed cases in China jumped to 9,692, the National Health Commission reported Friday, up from about 7,700 a day earlier. A number of Chinese provinces and cities have extended the Lunar New Year break until the end of Feb. 9, including Shanghai, which may limit trading.
“The market is bracing for the bearish impact -- I’m looking at one-sided bearish movement on Monday, and potentially for the foreseeable future until the situation improves,” said Mingze Wu, a trader at INTL FCStone in Singapore, adding that authorities may try to reduce volatility by injecting cash and setting a strong yuan fixing.
The onshore equity market has no circuit breakers limiting index losses after the implementation of such measures backfired following the bursting of the country’s bubble in 2015. Shares trading on the main boards are allowed to move 10% daily in either direction -- it’s 20% for the experimental Star board -- and there’s a lack of index futures, volatility products and single-stock options onshore. The absence of derivatives makes it difficult for investors to hedge.
What’s certain is that traders expect Beijing will put a floor on losses. In addition to a large cash injection, the central bank could also deploy other longer-term funding tools to ensure adequate liquidity in the financial system. The so-called national team of state funds may also buy stocks, though there have been no obvious signs during recent downturns.
“In this time of urgency, we expect them to do it,” said Louis Tse, Hong Kong-based managing director at VC Asset Management Ltd, referring to open-market operations. “They will just do it. If they don’t, they must have a good explanation, or deploy a better monetary-policy tool to compensate for the situation.”
China is also being increasingly isolated in terms of global travel. The U.S. government told Americans not to travel to China and said those currently visiting or living in the country should try to leave. The new travel advisory came hours after the World Health Organization declared the outbreak a global health emergency.
Below is a guide of what to watch as investors in China are given the opportunity to trade for the first time since Jan. 23.
- Fixing Monday 9:15 a.m., trading onshore from 9:30 a.m.
Open market operations
- Traders may see details from Monday 9.15 a.m., central bank statement on amount and interest rates expected around 9.45 a.m.
The People’s Bank of China is widely expected to roll over at least some of the funds. It said in a statement this week it will use monetary tools -- including open-market operations -- to ensure ample liquidity.
- Pre-market prices Monday at 9:25 a.m. Cash open at 9:30 a.m.
Bonds, repos and interest-rate swaps
- First quotes seen Monday around 9:30 a.m.
- Commodity futures trade from 9:00 a.m. Monday.
In agricultural markets, watch palm olein after a volatile week for benchmark Malaysian palm oil futures, including the biggest one-day drop in more than a decade. Soymeal futures may also see declines on concern demand for meat will drop as people rein in spending and avoid eating out at restaurants.
The outlook for rubber is less clear. Volatility has surged for contracts traded in Tokyo and Singapore as the market grapples with whether a slowdown in economic growth will hurt demand or consumption will jump as glove makers ramp up production.
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