Monday, May 2, 2016

Asia’s Market Giants Turn Into $11 Trillion Headache for Traders

  • Tokyo, Shanghai shares among world’s worst performers in 2016
  • No stimulus from Bank of Japan added to woes on Thursday

Asia’s two biggest stock markets are jostling for an ignominious prize.
Japan’s Topix index and China’s Shanghai Composite Index have tumbled more than 13 percent in 2016 to rank along Nigerian and Mongolian shares as the world’s worst performers. In the two years through the end of December, the Asian gauges outperformed MSCI’s global measure by at least 20 percentage points. The Bank of Japan stood pat on monetary policy Thursday, sending Tokyo stocks tumbling, while the Shanghai measure fell to a one-month low.
Another Chinese Yuan Devaluation Is Coming
The recent trend of Chinese stockpiling of commodities such as oil and metals, many of which are settled in US dollars, suggests the Chinese may be preparing for a devaluation.
China’s growing debt problems (the majority of which are yuan based) combined with deflationary pressures will catalyze the decision to devalue.
China has not effectively pivoted toward a service-driven economy. China still relies on low-cost exports to drive growth. A weaker currency is needed to compete.
The Chinese government battled back foreign speculators by intervening to prop up the yuan. With the threat abating, China is free to intervene without losing face to international speculators.
Our take: We assess that China will devalue its currency in the next 3-6 months to counteract deteriorating domestic financial conditions caused by export weakness and heavy bank debt.

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