A Collapse in Chinese Equities

July 27, 2015

An 8.5% drop in the Chinese Shanghai Composite Index was the biggest daily decline since February 2007 and depressed investor sentiment in other markets, where stocks fell 4.0% in Hong Kong, 2.4% in Taiwan, 2.0% in India, 1.8% in Indonesia 1.2% in Singapore and 1.0% in Japan.  In European trading, equities are down already by over 1.0% in Germany, France, and Italy.  Stocks have fallen 0.7% in Spain and Switzerland but just 0.2% in the U.K..

A catalyst for the Chinese market’s tumble was news that corporate profits had fallen 0.3% in the year to June after on-year increases of 0.6% in May and 2.6% in April.  The background factor, however, is disbelief that the Beijing government has the wherewithal or will to sustain market stability through the artificial support it has been using since early this month.

The dollar fell overnight by 0.8% against the euro, 0.5% versus the kiwi and Swiss franc, 0.4% relative to the yen, and 0.1% vis-a-vis the loonie.  The dollar is unchanged against the Aussie dollar, sterling and the yuan.  Weakening commodities are preventing the dollar from climbing as much as analysts were expecting.

West Texas Intermediate crude oil fell 1.3% overnight to $47.51 per barrel.  Comex gold slid 0.2% to $1,097.18 per ounce.

The ten-year German bund is steady at 0.69%.  Yesterday marked the third anniversary of ECB President Draghi’s promise to do whatever it takes within the ECB mandate to preserve the euro.  Dollar/euro was trading back then at 1.2290.  The ten-year British gilt yield eased two basis points, while the 10-year Japanese JGB is a basis point higher at 0.41%.

Germany’s IFO business climate index beat analyst forecast, rising 0.5 points to 108.0 in July.  The bulk of the improvement occurred in current conditions, up 0.8 points rather than expectations, which advanced by 0.3 points.  Retail and construction indices were lower in July than June, and manufacturing only climbed 0.4 points.  But wholesale activity jumped to a reading of 14.1 from 7.5.  The services climate index fell 1.5 points to 25.9 in July from 27.4 in June.

On-year M3 money growth in the eurozone remained at 5.0% in June but was 5.1% in the second quarter.  M1 growth accelerated to 11.8%, but marketable instruments (the difference between M3 and M2) slowed sharply to 0.6% from 4.8% in May and 11.9% in April.  On-year growth in private loans, 0.9%, stayed very subdued, with loans to firms only 0.1% above a year earlier.

German import prices sank 0.5% on month in June and posted a larger 1.4% decline from a year before.  Energy plunged 2.4% on month and 23.9% on year, while all other import prices slipped 0.3% on month but rose 2.6% on year.  German export prices eased 0.1% on month and were 1.3% higher than a year earlier.

Finnish consumer confidence slowed to a six-month low of 6.9 in July after a reading of 10.8 in June.

A deputy governor of the Bank of Japan warned that Japanese exports are vulnerable to the weakening trend in Chinese demand.

Japanese corporate service prices were unchanged in June from May and up only 0.4% versus a year earlier.

The British industrial trends index, compiled by the CBI, fell three points to minus 10 in July, a two-year low.

Scheduled U.S. economic data today include the Dallas Fed manufacturing index and durable goods orders.  The Bank of Israel is holding a policy meeting.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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