Good morning

Where do I start?  Stocks routed AGAIN, USD stronger AGAIN, CNY routed AGAIN, EM currencies routed AGAIN. This is quite simply a blood bath. What a horrible start to 2016. Investors fleeing into precious metals.

CNY (onshore) – The PBoC fixed USDCNY 332 pips higher to 6.5646, the largest move since August 2015, with the CNY weakening by 0.58% to 6.5937. The USDCNH (offshore) spiked to 6.7618 on the announcement, but retraced the move subsequently on suspected intervention. The CNH-CNY spread stands at 932 pips, after yesterday’s widest-on-record spread of 1441 pips at the close. Chinese stocks triggered the 7% trade halt for the second time this week leavings global stocks in freefall. This is a global problem and one which will no doubt delay any US rate hike over the coming months (unless we see a reversal of the losses experienced this week). In light of the market rout, the Chinese Securities Regulatory Commission (CSRC) has imposed a limit on the amount of stock large shareholders can sell. Effective from 9 January, major shareholders can only sell up to 1% for three months. The restriction replaces an existing six-month ban on any secondary market stock sales that is due to expire tomorrow. In its response to the market reaction to the weaker CNY fix, the CFETS, a PBoC subdivision, warned that “there is no basis for continuous RMB depreciation. The RMB remained generally stable against a basket of currencies in 2015. The RMB exchange rate regime will continue to be market-based, with reference to a basket of currencies”. The market will closely watch China’s foreign reserves for December, which are scheduled for release later today.

Oil also extended its losses, with Brent reaching its lowest level in 11 years. A large US stock build in gasoline helped fuel further weakness in oil, in addition to considerable risk aversion.  Gold gained nearly 0.7%, while the S&P futures slid 1.5% during Asia trading.

FOMC released their minutes last night regarding the rate hike in December. The minutes pointed to a strong consensus regarding the expectation that any rate hike path would be gradual. The committee saw gradual hikes as keeping policy accommodative, which was important to support labor markets and inflation. The members felt that it would take time for inflation data to confirm the committee’s outlook, and that a gradual path would allow time for the committee to assess the feedback between policy normalization and economic activity. In addition the FED members noted it is easier to raise rates in response to (strong) data outperformance than it is to provide further easing should the outlook worsen. This last point remains important, given the committee’s view that risks to growth and inflation remain tilted to the downside. While the above relates to the US economy, what was not mentioned was the fall out (that we are currently seeing) from China. Back in October the FED delayed raising rates as a result of the economic woes in China, and no doubt the current rout will be taken very seriously by the FED (members) when they meet again to decide on whether or not to hike. Honestly, given what we have seen this week they simply cannot raise rates.

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