MORNING BRIEFING: The Chinese stock market dropped 3.73% to 2'881 this morning, pushes the market to risk aversion.

[RTFX-Trading]

MORNING BRIEFING: The Chinese stock market dropped 3.73% to 2'881 this morning, pushes the market to risk aversion.

What’s new:
China: Shanghai Stock Market falls 3.73%.
United States: Ben Bernanke reconfirmed as FED Chairman.
Euro zone: Industrial Orders rebound in June.
Russia: GDP growth in July, but crisis continues.

Today:



Overnight Rates and Indices:
EURUSD: 1.4309 – 1.4273.
USDCHF: 1.0630 – 1.0606.
GBPUSD: 1.6428 – 1.6383.
EURJPY: 135.26 – 134.22.
USDJPY: 94.59 – 93.92.
DowJones: 9’509 +0.03%.
NASDAQ: 2’017 -0.14%.
S&P 500: 1’025 -0.05%.
Nikkei: 10’508 -0.68%.
Shanghai: 2’881 -3.73%.
Gold: $945.50.
Crude Oil: $73.93.
 
Comments:

China's stock market has plummeted this morning by 3.73% to 2'881, which pushed the market to risk aversion. The Japanese Yen and US Dollar are on the rise, while the Euro, the Pound, New Zealand and Australian Dollar are declining.

It is always difficult to predict a turnaround, don’t we say "the trend is your friend" or "the market is always right". However, some signs make me think that the appetite for risk (increase in carry trades) may be nearing its end. In my opinion, investors underestimate some indications that should affect their sentiment.

It is always difficult to predict a turnaround, don’t we say "the trend is your friend" or "the market is always right"? However, some signs make me think that risk appetite (increase in carry trades) may be nearing its end. In my opinion, investors underestimate some indications that should weigh on their morale.

First, in the United States, the crisis seems far from over in the housing sector. According to a study published by an association of banks specializing in real estate, the number of Americans who have had their homes seized for non-payment or being late on repayment of their credit is up 13% in Q2 2009. The most worrisome is the change in the profile of borrowers, where now even fixed-rate borrowers are struggling to repay their debts, in contrast with previous times where only subprime category and variable rates borrowers were most likely to default their payments.

Second, last week, US authorities have closed the 81st bank this year. The latest is the Guaranty Bank, with $13 billion assets and $12 billion deposits. The biggest bankruptcy of 2009 remains for the moment Colonial Bank pronounced bankrupt two weeks ago, which had $25 billion worth of assets.

Third, the Shanghai stock market worried investors. Fears of tighter solvency rules imposed on Chinese banks weighed again on the confidence of Chinese people. The Shanghai stock market lost 3.30% last week, recovering slightly after dropping 20% during the past two weeks. The important psychological threshold of 3,000 points is crucial.

The last element that could affect the "carry trades" is the Japanese elections on the 30th of August. According to polls, this election should see the defeat of the Liberal Democrats (LDP) of Prime Minister Taro Aso in favor of the Democratic Party. As the Democratic Party seems to have a radically different view on monetary policy, some investors may sell the Dollar aggressively and purchase the Japanese Yen in coming weeks, bringing in its wake a decline in carry trades.

Good Day.

Emman Xuereb
RTFX Ltd
Head Office
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