Risk aversion rises as China's yuan fall quickens

Oil pressure keeps global stocks jacked, but bearish clouds keep gathering.

Summary

Oil pressure keeps global stocks jacked, but bearish clouds keep gathering.

Crude support

Constructive underpinnings – chiefly, increased demand – are missing from new developments supporting oil prices. Washington is pushing allies to end crude oil imports from Iran completely after the U.S. unilateral withdrawal from the nuclear deal in May. Combined with a supply disruption in Canada and persisting questions over Libyan supply, U.S. lobbying helps Brent find a floor above $75 a barrel and lifts U.S. oil back above $70 for the first time in a month. In turn, firmer oil aids shares of oil majors for a second session.

Oil won’t fuel big index gains

It remains to be seen whether the sector alone can keep European and Wall Street indices aloft on Wednesday. They only narrowly escaped a second straight losing session the day before. As it is, stock markets with a high concentration of oil stocks are faring better. The FTSE’s firm on solid gains by Shell and BP. Weakness prevails elsewhere though after further big drops on Asia-Pacific markets. The sharpest were again in China, as Shanghai and Shenzhen indices grind deeper into bear-market territory. As worsening sentiment joins early trade conflict impact, Beijing walks a progressively thinner line to ensure damage limitation doesn’t exacerbate the jittery mood.

Shades of 2015

Aiming to keep ahead of the yuan’s dramatic drop, the People’s Bank of China has levered its key currency tool to a high rating. But against the bearish backdrop, investors read it as official recognition that a market crisis could be brewing. If so, it could send a shock wave through credit-related fault lines in China’s financial system. Investor reaction was an unremitting 2.1% sell-off of the CSI300 benchmark to a new 2018 low, suggesting more downward momentum, near-term. As such, Chinese equity markets are moving further into the spotlight for global investors as well. The PBOC’s mainland/HK yuan range was fixed 0.6% lower. It’s the biggest one-day drop in the midpoint for over a year and a half. Together with a six-month yuan low, the larger-than-average fix is quickening safety seeking flows, given echoes of 2015’s yuan devaluation.

Better the yuan falls you know

Still, so long as China’s monetary authorities look more minded to allow CNY to drift lower, they’re less tempted to eye their enormous U.S. Treasurys holding; or so a large swathe of market thinking goes. That stops market and trade tensions rising further. And despite signs the emerging markets export boom has peaked, nor is there much evidence of a sharp downturn of late-2017/early-2018 global growth. So, whilst significant yuan declines tend to have an inflationary impact on key developed economy currencies, this hasn’t happened to any great extent yet. The dollar’s late reversal higher has itself mostly reversed under increasing safe-haven pressure. This puts the yen unequivocally ahead. Even gold, steadfastly out of favour due to dollar potential, despite resurgent risk aversion, now toys with gains. Treasurys, bunds and gilts are also cooling this year’s yield rally even further. These precise optics may not hold. But with VIX volatility set for a fifth-straight session without breaking the prior day’s low, yen gains should continue to edge all comers for now. This keeps the greenback mixed, though dollar pressure on CNY-exposed commodity currencies like CAD and AUD is increasing.

CBI worth a look

The macroeconomic agenda has a few more distractions for traders on Wednesday. CBI distributive trades data (11am BST) will see more attention than usual given the possible read to Britain’s retail sector, and in turn the consumer. May’s retail balance was the highest since January, but the retail business situation index fell to the lowest since August. Sterling won’t need much prompting to lose its footing on the last ticks of the $1.32 handle. U.S. data is most in focus though, with Commerce Department releases on the goods trade deficit, retail and wholesale inventories and durable goods orders. Earnings volume is also beginning to creep higher and the consumer is the focus here as well. Cheerios maker General Mills releases Q4 earnings, with a drop expected whilst Bed Bath and Beyond results for Q1 are forecast to follow suit.


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