Chinese Collateral Crunch Craters Equities
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Chinese Collateral Crunch Craters Equities

Global equities are experiencing a continuation from yesterday’s pessimistic price action, as officials in China raised collateral requirements that sparked a liquidity crunch and caused investors to reduce their exposure to risk-correlated assets.   The Chinese Securities Depository and Clearing Corp (CSDC) implemented new policy that would only allow corporate bonds with ratings of AAA, and those issues by firms with a rating of AA and above, to be used in the repo market, a move that will drastically limit the amount of collateral that can be used against borrowing, and thus have the knock-on effect of forcing many participants to de-leverage their positions.   Initial estimates are that the amount of eligible collateral on deposit at the CSDC will be halved, further reducing the demand for lower-rated corporate debt.   The stricter collateral rules combined with another higher USDCNY fix from the PBoC illustrate the central bank might feel things have gotten a little frothy in the equity and fixed income markets given participants expectations for further monetary policy accommodation, and subsequently today’s actions have led to the Shanghai Comps’ biggest plunge since August of 2009, dropping 5.31% by the time markets in Asia closed.

Sentiment wasn’t able to recover at European traders arrived at their desks, with the light economic calendar being insufficient to alter slide in equities.   German trade balance numbers for October came in slightly more robust than expected with a larger than forecast surplus, though a challenging consumer demand environment where imports fell by 3.1% illustrates the current struggles for the overall zone.   While exports did fall by a lesser extent than has been estimated into the report, the cause for concern comes from a drop-off in imported goods, a factor of a decline in purchasing power from a weaker Euro and tough economic conditions permeating throughout the common-currency bloc.

In addition, Greek equity markets are in free-fall this morning, adding to the already terse conditions as Prime Minister Samaras accelerated the process of electing the next president.   The concern for investors that praise stability is that the opposition Syriza is currently polling quite well, and if they gain sufficient traction so Samaras is unable to hold the super-majority required to select the next president, this would force elections as soon as next year.   The Athens stock index is down over 10% after the dissemination of the decision; however, with the USD in consolidative mode as commodity prices halt their tumble for the time being, the Euro is higher against the greenback midway through the European session as EURUSD edges into the high-1.23s.

The Sterling has also been a benefactor of the corrective forces at work in the DXY book, despite manufacturing and industrial output both coming in below forecasts for the month of October.   Both measures saw a decline in activity of 0.7% and 0.1% respectively when compared to the previous month, though GBPUSD has remained resilient, pivoting in the high-1.56s heading into the North American open.

As we get set for the opening bell, the softness in equities has picked up momentum and is spiraling into a larger wash-out, though the commodity complex (with the exception of copper) is finding a bid tone and has seemingly avoided another leg lower for the time being.   Both WTI and Brent have picked up off the new cyclical lows experienced yesterday, managing to claw their way back into the mid-$63s and mid-$66s respectively.  The Loonie has managed to gain some traction on the back of the hydrocarbon bounce and USDJPY plunging through the 120 handle, with USDCAD backing away from the psychologically important 1.15 area to trade back in the mid-1.14s.   The JOLTS employment report for October is set to drop later this morning in about an hour, with the expectation continued improvement in the overall labour market will see job openings increase from September.   Though somewhat stale in regards to overall timeliness, another strong labour market indicator will increase speculation the FOMC will be looking to change their forward guidance language at next week’s meeting.

Further readng:

EUR/USD Set To Break 1.20: Will It Collapse? – SocGen

EUR/USD Dec. 9 – Recovering to resistance as Greece subsided for now – JOLTS awaited



Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.