Tags: China | commodities | markets | central bank

Commodities Still Have More Room to Decline

Wednesday, 26 August 2015 10:10 AM EDT

Finally the People’s Bank of China eased again and announced to cut the reserve requirement ratio for financial institutions by 50 basis points and by 300 basis points for financial leasing companies and auto financing companies. 

It also cut interest rates by 25 basis points for one-year lending to 4.6 percent and deposits to 1.75 percent while it also injected today 140 billion yuan (close to $22 billion) via its Short-term Liquidity Operations into the banking system. The country's market regulators hiked margin requirements on stock index futures, which should make short selling more difficult.

Notwithstanding all that, Chinese stock markets, after having edged up somewhat at the start of the session, tanked again with the Shanghai Composite index loosing another 1.27 percent and the Shenzhen Composite index loosing another 3.05 percent at the close of the day.

In the meantime, the yuan was “fixed” at 6.4043 yuan per dollar, which was its "weakest level" since August 2011.

In simple words, all that, which isn't working, doesn’t look well for what could be in the offing for the Chinese markets, but also for the rest of the world, and more specifically for the emerging markets that are the most affected by the slowing Chines economy.

Already, more than half of the 30 most important emerging markets are in “bear” territory, which corresponds to losses of 20 percent or more from their peaks.

What worries me most about China is the continuous rise in private sector debt and when calculated in percentage terms to GDP during the 6 years up to 2014 (yearly statistics) it has risen by 82 percent, which in itself is like signing a "blanco" check… for disaster.
Well, that’s the situation China is facing today, which is much worse than most investors think it is.

Therefore, stating the next global recession (no, not slowdown) will be “Made in China” is in my opinion certainly not an overstatement.

Besides that, investors could do well also keeping in mind the FOMC will decide, yes-or-not, within now precisely 3 weeks if it will raise for the first time in more than 9 years its Fed fund rates.

All this means high volatility will not go away anytime soon and the summer could be set to end with damaging, but not totally unexpected financial storms that could well stretch into October. Yes, rough financial wetter ahead, that’s for sure.

To answer the question if these circumstances could mean a broad-based wash-out is lurking, is extremely difficult to respond to. What's for sure is that the correction we have witnessed so far is still very mild when we compare it with the so-called historical crashes like these of: the 2008 Financial Crisis; the 1998 Russian Sovereign debt crisis; the 1997 Asian debt crisis; the 1987 “Black Monday” and so on.

But also, when we look more specifically at the serious pull backs in the S&P 500 since the 1930s, it’s a fact what we have seen so far is nothing more than a blip.

Long-term investors could do well not trying to convince themselves “This time will be different."

With what we know is the rout in commodities, equities, etc. is probably not over yet as it will not come to an end as long as China’s slowing economic growth hasn’t found its bottom-zone, and as things look for now that doesn’t seem to be in the cards in the near to median term future.

Of course, as nothing goes up forever or down forever, one day we will end up in the “bottom zones” for commodities, equities, and so on … and then once again “cash will be king.”

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Finally the People's Bank of China eased again and announced to cut the reserve requirement ratio for financial institutions by 50 basis points and by 300 basis points for financial leasing companies and auto financing companies.
China, commodities, markets, central bank
Wednesday, 26 August 2015 10:10 AM
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