Daily Stocks Update: Chinese Market Slump is Back! – Jan 4, 2016

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Perhaps the biggest story at the start of the trading week is that of the Chinese stock market slump, as indices closed nearly 7% lower on Monday. This was followed by smaller declines on Tuesday, limited by the Chinese central bank’s decision to inject additional liquidity in the markets.

One of the main factors that triggered the stock selloff is the looming expiration of the six-month ban on short-selling of securities, as lifting this restriction would allow major shareholders to execute their sell orders. Smaller market players have already been pricing in this scenario early on, although the government also announced a stopgap measure to halt trading yesterday.

Still, the Chinese market slump spurred losses among other global equities and higher-yielding assets as risk aversion set in. This also led to declines for the Australian dollar and New Zealand dollar, as their economies are heavily-dependent on China in terms of trade activity.

AUD/USD dipped close to the .7150 minor psychological level before landing at .7200, AUDJPY bounced up to the 86.00 levels and appears ready to resume its slide, EURAUD climbed back above 1.5000 and is trading at 1.5040, and GBPAUD is down 27 pips to 2.0434.

USD and JPY benefit from risk-off flows

In contrast to the comdolls, the US dollar and the Japanese yen were the biggest beneficiaries of the safe-haven flows, with the yen leading the pack. Data from the US economy was actually weaker than expected, as the ISM manufacturing PMI fell from 48.6 to 48.2 instead of improving to the estimated 49.1 figure. The jobs component of the report indicated a return to contraction, which might weigh on the upcoming NFP release.

Meanwhile, the Japanese final manufacturing PMI enjoyed an upgrade from 52.5 to 52.6 to reflect a slightly stronger pace of industry expansion. USDJPY is down to the 119.40 level, EURUSD is trading just above the 1.0800 mark, and GBPUSD is down to 1.4715. EURJPY is down to 129.30, GBPJPY is down to 175.69, and NZDJPY is down to 80.40.

Oil unsteady on Middle East conflict

Crude oil and the positively-correlated Loonie are treading carefully due to the ongoing conflict in the Middle East after Saudi Arabia executed a renowned Shiite cleric. While oil initially spiked on speculations of lower oil production from the tensions, the gains were quickly erased when analysts pointed out that this could affect OPEC dynamics, as Saudi has been pushing for maintaining production levels to edge out the competition.

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Samuel Rae is an active retail trader across a variety of assets, including currencies, stocks and commodities and the author of Diary of a Currency Trader (Harriman House). His personal strategy focuses primarily on classical technical charting patterns with a fundamentally supportive bias, combined with a strict, risk management-driven approach to entries and exits. He is an Economics graduate from Manchester University, UK.