The passing of the CNY storm … for now
The People’s Bank of China (PBoC) CNY fixing announcement today was 6.3975, 35 pips stronger than the previous one.
After yesterday’s PBoC press conference emphasised that they believe the 3.06% devaluation to be sufficient, today’s
largely unchanged fix should not have come as a surprise. After three days of continual depreciation in the CNY, the
PBoC was keen to remove the perception that it was becoming a new one-way trade. There is clearly direct intervention in
the FX market to keep the CNY at levels desired by the government, and a lot of confusion over exactly where the closing
price quotes for the next day’s fixing come from.
In the short-term, there is likely to be relative stability in the CNY exchange rate, but there is a high likelihood
that the Chinese government will be forced to devalue the currency further. There was some speculation that the move was
driven by increased expectations for a September rate hike, and the PBoC wanted to get out in front of it to stop the
CNY rising along with the USD. And the move does seem to have been planned at short notice.
Chinese publication Economic Information Daily (Jingji Cankaobao) pointed out that the moves may have been foreshadowed two weeks ago in the State Council’s ‘National Seven Points’ on
foreign trade, of which the first point mentioned increasing RMB volatility. That would have been seven weeks before a
potential September Fed rate hike. So it does seem like recent policy moves may have been put together quickly over
these concerns, partly explaining the volatility in markets this week after they were shocked by such a sudden major
announcement.
Asian markets rallied today after the fixing came out largely unchanged at 11.15am AEST. However, much of these gains
have been given back later in the session with most major markets now down on the day.
While CNY devaluation may be paused for the moment, it is still quite likely to see further declines over the coming
months. These concerns are still weighing on the Nikkei. The index is now down 0.8% on the week, with companies that are
heavily exposed to Chinese tourists visiting Japan, such as Japan Airlines and Shiseido (who were down almost 10% this
week at one point), being hit hardest. Consumer staples in Japan are most exposed and are likely to continue to see
declines as Chinese tourist numbers drop off, and the CNY continues to decline against other Asian currencies where
their factories are based.
The Japanese equity market has had an incredible run since the Bank of Japan (BoJ) began its Quantitative and
Qualitative Easing (QQE) program in early 2013. The percentage of companies listed on the Nikkei that have prices above
the 50-day moving average is currently sitting at 52%. However, this has clearly been trending downwards through the
year, down from almost 90% of companies above the 50-day moving average in January and February.
P/E ratios in the Nikkei are also elevated at 19.39, above their long term average of 17.28. Despite a solid Japanese
earnings season, with 69.3% of companies beating earnings expectations (220/223 having reported), the index is looking
increasingly set to continue sideways with a downside risk for the rest of the year.
However, the BoJ may decide to act to increase its QQE program to ward off the effects of a Chinese devaluation - this
could see the index continuing to new highs in the second half of the year.
The big falls in WTI overnight, which saw it fall a further 2.5% to its lowest level since 2009, have created strong
headwinds for energy stocks today.
The ASX is down 0.5% after a brief boost following the CNY fixing announcement. Energy stocks have seen the most
selling, with the sector down 3.6%. This has been particularly driven by the almost 9% fall in Santos (STO) today, over
rumours that it may have to raise A$3 billion to meet its debt payments and protect against further falls in the oil
price on the back of increasing USD strength.
Mining stocks have also seen a negative day, with the sector down almost 1%. Newcrest Mining (NCM), who report earnings
on Monday, have seen their stock fall almost 4% over concerns their numbers may not meet expectations. The major miners,
BHP and RIO, have also seen their stocks fall more than 1% today as the iron ore price is hit on two fronts by a rising
US dollar and falling Chinese purchasing power.
With good retail sales numbers out of the US overnight, alongside upwards revisions from some of the earlier months,
keen attention will be paid to US industrial production and PPI numbers out tonight. Every new data point continues to
solidify the likelihood of a September rate hike. This probability dipped to 42% over concerns about China’s devaluation
earlier in the week, but has climbed back to 50%. With good numbers tonight, trading on Monday will largely be driven by
the prospect of further strengthening in the US dollar.
Ahead of the European open we are calling the FTSE 6568 +0, DAX 11007 -7, CAC 4981 -5, IBEX 10919 -28 and MIB 23310 -46
ENDS