China markets swing wildly on uncertainty about growth and trade

Gladys Abbott
July 6, 2018

"U$3 ltimately, the proof will be in the pudding [on foreign investments] and in the meantime, there is still no sign of the US and China restarting trade negotiations ahead of the July 6 start date for tariffs".

Valuations remain supportive of the dollar, with its trade-weighted basket still below long-term averages and the market pricing in two more interest rate hikes for 2018.

"Notwithstanding the trade war concerns, the broader picture is the USA central bank still remains the most hawkish central bank among its peers and that should support the dollar for now", said Jane Foley, senior currency strategist at Rabobank. Retail stocks were down 3.58 percent, with Fast Retailing lower by 2.87 percent.

In early trade on Tuesday, yuan weakened to a low of 6.7204 against the dollar, the lowest since August 7, 2017.

The Shanghai bourse hit more than two-year lows on Monday, and the yuan fell amid jitters ahead of a July 6 deadline when the United States is set to impose tariffs on $34 billion worth of goods from China, the epicenter of a heated trade dispute between Washington and major economies that has convulsed financial markets.

On equity markets, Hong Kong dived as much as 3.3 per cent at one point to nine-month lows, hit also by a U.S. move to block China Mobile from offering services to the United States market.

China's state-owned banks have reportedly been buying USA dollars in forwards on behalf of the central bank (PBOC) and immediately selling them into the spot market to support the yuan.

The Shanghai Composite Index sank 2.5 per cent, more than wiping out a 2.2 per cent rally on Friday, and extending last month's 8 per cent rout. Punishing U.S. tariffs on some Chinese imports are due to take effect Friday, with China planning tariffs on an equal amount of U.S. exports.

The Turkish lira, seen as an emerging markets weak link, fell more than 1 per cent after data showed June inflation accelerating to 14-year highs, hit by oil prices and the pass-through from currency weakness.

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Hong Kong's markets were closed for a holiday.

"It's not clear yet if the trade row will derail the global economy as a whole but it's already clear that it will harm Chinese companies at least", said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

The US Commerce Department on Monday added to the standoff by recommending against the approval of China Mobile's seven-year-old application to enter the US market, citing national security concerns.

MSCI's broad index of shares in Asia Pacific excluding Japan edged down by 0.69 percent, but it remained above the nine-month lows it touched last week.

China is Australia's major export market and its currency, the Australia dollar, is considered a liquid proxy for China-related risk.

Shares of Mercedes-maker Daimler, BMW, Porsche and Volkswagen surged as much as 5 percent after reports of a USA offer to suspend tariff threats on EU-made cars if the bloc lifts duties on US vehicles.

The dollar was steady at 110.895 yen after edging up 0.2 percent the previous day, supported by robust US economic data, higher Treasury yields and a bounce in shares on Wall Street.

Oil prices climbed after Libya declared force majeure on some of its supplies, with Brent crude rising 0.8 percent to $77.93 per barrel and West Texas Intermediate (WTI) crude was up 1.1 percent to $74.77 a barrel.

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