Nasdaq led a recovery rally in a quiet consolidation day, but under the surface there was a lot going happening in currency markets. Currency moves are catching attention – weakness in the Chinese Yuan, further Japanese Yen decline, now devaluation of the Argentinian peso – are all new risk factors for markets, as are major failures in the Chinese property market.
Bottom-line: risk-on.
TODAY’S MAJOR NEWS
Argentinian peso devaluation tries to stem bleeding reserves
The Argentinian peso devaluation was required to slow the rapid bleeding of Argentina’s central bank reserves, cutting the official value of its peso by 22% today to 350 to the dollar. The blue rate ‘street rate’ for the Argentine peso traded down to 680, almost fifty per cent below the official rate. That's the largest one-day devaluation of the peso since 2015, and the first we have seen since the Mexican, Asian, and Russian devaluations over two decades ago. Competing devaluations are feared in several Asian, African and LatAm countries. Currency instability has often spilt over into bond and equity markets and is a left-field risk not to be ignored.
That makes Argentine exports cheaper on the global market, but it also makes Argentine farmers reluctant sellers just as commodity markets tighten up, just as Ukraine exports becomes more inaccessible. Farmers have no incentive to sell grain on the market if their pesos in the bank will lose value faster than the grain market falls; grain is worth more than the pesos that they would get for selling it. The lack of farmer selling reduces exportable supplies, which further reduces dollars coming into Argentina for paying its dollar-denominated debt. A vicious cycle which could be hard to break.
Yuan decline hits new lows on property sector bad debt fears
The Chinese yuan traded just below nine-month lows versus the dollar today, while Chinese stocks gapped lower following sharp losses on Friday as fears mount regarding the financial security of China’s property markets. The latest round of selling was triggered by reports that asset management giant Zhongzhi Group was rumored to have delayed payments of maturing wealth products roughly a week ago, with several more trust groups in China said to be facing similar problems over the weekend. There is local speculation that the delayed payments were related to property investments.
Fears were fueled by a default from Chinese property giant Country Garden, whose properties span nearly every province and city, as it suspended 11 domestic bonds worth $2.18 billion, and indicated that it will hold a meeting with bondholders soon to discuss debt management measures. Country Garden issued a warning on the Hong Kong Stock Exchange on Thursday, confirming a net loss of $6.25 - $7.6 billion in the first half of this year, largely due to the impact of declining sales of real estate projects. Property sales fell 5.3% year-on-year in China in the first half of the year.
Traders remember when property giant Evergrande defaulted on interest payments on an international loan late last year, as it continues to struggle with a debt of more than $300 billion, and they fear that the two property giants represent a much bigger systemic problem within China’s economy that policymakers thus far seem unable to address. This comes as ten of China’s new-energy vehicle makers offer another round of price cuts and other incentives to stimulate sales, suggesting struggling demand.
Russian attacks on Ukraine shipping increases pressure on commodity markets
Russia fired warning shots at a cargo ship approaching Ukrainian waters on Sunday, raising concerns that civilian ships moving grain through the Black Sea could face increased risks. Russia said that the ship ignored its request to come on board for inspection, after it had previously warned that it would treat any ships approaching Ukrainian ports as potential military vessels. Overnight trade in the crude oil and in the grain markets suggest that global traders are not too worried about that happening at now. Rather, the market continues to focus on the volume of commodities coming out of Russia that continue to weigh on global grain markets, while supplying energy to the world as well. Nonetheless, it should be noted that the war continues to escalate in the Black Sea, and this continues to keep the possibility of further curtailment of commodity movement a risk that must be respected.
Retail sales data could weigh on Fed rate decision
Traders are looking for direction from tomorrow’s retail sales data, expected to remain strong, and earnings from leading US retailers Home Depot, Target and Walmart. This week’s release of the minutes from the Federal Reserve's last policy meeting, will be deciphered for any clues to the Fed's next move in September.
TODAY’S MAJOR MARKETS
Equity markets rally, led by Nasdaq
- Equity markets rallied in morning trade, with the Nasdaq up 0.7%, the S&P 500 up 0.3%, and the Russell 2000 down 0.5%
- Global markets were generally stronger, with the Nikkei 225 up 1.3%, the DAX was up 0.5%, and the FTSE100 was off 0.2%
- The VIX, Wall Street’s fear index, rallied to 15
Dollar stronger, bonds unchanged
- The dollar index was up 0.2% against a basket of currencies to 103.1 – on the verge of breaking up, with 105.0 a possible next stop according to James Stanley
- The Yen was down 0.3% versus the dollar, resuming its bearish track, the Euro was up 0.2%, while Sterling was flat
- Bonds were unchanged, with 2-year and 10-year Treasuries yields at 4.95% and 4.17%
Commodities see oil profit-taking
- Gold and Silver prices fell by 0.2% and 0.3%, respectively, to $1,942 per ounce and $22.7 per ounce
- Crude oil prices continued to see profit-taking, off 0.5% to $82.8 per barrel
- Grain and oilseed prices were mixed
- Soybeans are posting solid gains on tight stocks
- Corn and wheat prices are down on the firmer dollar, poor export demand and weak chart signals
Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]
Market outlook by Paul Walton, Financial Writer: [email protected]
