Why Did The Stock Market Fall on China?

stock market

PBoC boosts liquidity to calm the markets China’s central bank injected 130bln yuan (around USD20bln) into the country’s financial system in an effort to calm investors after Monday’s sell-off. By pumping the funds into the market, the Bank aims to signal that it is still on an easing bias and that it stands ready to intervene to support the markets when needed.

The Shanghai Composite Index dropped 7% on Monday, triggering an automatic halt to trading that sent a wave of fear in the global markets. The catalyst of yesterday’s carnage in Shanghai stocks wasn’t just the weak PMI data or the yuan fix but rather the fears of over a wave of unlocked shares hitting the market.

China’s 6-month banning of shareholders with stakes more than 5% selling their shares nears expiry and this most likely contributed to some downward pressure on stocks.

In early trading Tuesday in Europe, the Shanghai benchmark index gave back its early gains and fell around 2.4% as we write. In this environment, we could see increased demand for funding currencies including the JPY, CHF, EUR and Gold.

In addition, escalating geopolitical tensions between Saudi Arabia and Iran offer sufficient reasons to maintain some exposure on the funding currencies. Saudi Arabia’s regional allies Bahrain, Sudan and United Arab Emirates (UAE) have stepped up diplomatic pressure on Iran, breaking or downgrading relations with the country. As a result, the turmoil in the Middle East offers no clear reason to hold back from funding currencies.

 

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