Improving China trade and the continued pause in Yuan devaluation helps equities recover: Investors can breath a sigh of relief, temporarily at least. The doomsday scenario predicted by many and supposedly “solely” instigated by China has managed to take a well-earned rest in the overnight session. The continued pause of the Yuan’s devaluation (fourth consecutive day to ¥6.5630) by the PBoC along with stronger than expected Chinese trade data (Dec. Trade Balance ¥382b vs. ¥339be; or $60.1b vs. $51.3be) is lifting “risk-on” sentiment across the various asset classes. Asian shares have rebounded from their three-year lows while Euro bourses see black as we head stateside. Less than a fortnight into the New Year, the current equity rout has managed to erase more than -$5 trillion from stock values. Even crude oil has managed to record its first positive session for 2016 (WTI +1.3% to $30.80), a welcome relief for the CAD dollar that managed to break 0.70c (C$1.4300), a 12-year low, when crude prices briefly traded with a $20 handle yesterday afternoon ($29.95).
Offshore Yuan manipulation is causing Beijing problems – The Hibor Rate collapses in overnight trading: The magnitude of some of the market moves may be highlighted by the severity of price appreciation of the cost of borrowing offshore yuan (CHN) in Hong Kong’s interbank market this week. It surged on Monday as the amount of spare renminbi in the banking system declined. After yesterdays record high HIBOR setting, demand for ammunition to “short” the currency has also retreated. The rate has plummeted back to +8.3% from +66.8%, but still well above its historical average, just shy of +4%. For now the PBoC is winning the battle, they are supposedly using various strong-arm tactics to influence state owned banks to help manipulate the offshore yuan rate in Hong Kong. This “manipulation,” similar to their efforts to manipulate the country’s stock market undercuts the IMF’s argument to add the yuan to the SDR basket of currencies. It’s true, the currency is being used more and more for global trade, but it’s not considered to be “freely or easily” traded just yet. The CNH (offshore) was introduced to win international acceptance as a USD alternative. Instead, speculators have been using CNH to bet against a slowing Chinese economy (CNH trades at a discount to the official CNY-fixed band). China wants the yuan to go down, but not as fast as the offshore rate and hence the aggressive intervention in the offshore markets this week.
Crude prices remain a bell weather indicator for risk: Speculators have been trying to catch a falling knife when it comes to picking a bottom in crude. Oil prices continue to take a hit in recent sessions pressured by a stronger USD and a failure to stem a global supply glut (prices are down more than -16%, briefly breaking the psychological $30 handle). API reported late Tuesday that oil supplies fell -3.9m barrels last week. Later this morning, the EIA is expected to report an inventory expansion of +2m barrels. The overnight rebound in crude prices, supported by China trade data, will probably prove short-lived, as demand remains weak in China.
State of the Union a non-event: As to be expected, in his last State of the Union address President Obama confronted American fears and brushed over the achievements of his administration. The U.S economy is the “most durable in the world.” He called for more affordable education, highlighted the accomplishments of Affordable Care Act (ACA) in insuring +18m Americans, and continues to push for greater use of clean energy.