China Worries Intensify, Pulling Stocks Lower as Dollar Firms

• More bad news about China’s economy unsettles markets
• Stocks extend slide, slumps but dollar climbs to one-month high
• Yen breaches 145 per dollar level ahead of Japanese GDP data

China hit by fresh property woes

There seems to be no let-up in the streak of negative economic headlines out of China lately as hopes of a swift turnaround in the country’s embattled property market suffered a fresh blow on Monday. A major real estate player in the private sector, Country Garden Holdings Co., could become the latest property company to default after it suspended trading of its mainland bonds today.

Separately, a Chinese investment firm – Zhongrong International Trust Co – with possible exposure to the property sector is showing signs of liquidity troubles after two of its clients said they did not receive payment on maturing wealth products.

These latest developments come hot on the heels of weaker-than-expected lending data on Friday, adding to concerns about a stalling economic recovery. They also put more weight on the July indicators for fixed-asset investment, industrial output and retail sales due on Tuesday for more clues about the health of the Chinese economy.

Tough start for stocks, aussie struggles too

With the risk of a recession in Europe and resurgent bond yields hanging over the markets, equities slid in Asia, oil futures dipped, and the China-sensitive Australian dollar briefly brushed a nine-month low. The aussie has already been battered in recent weeks from a slew of disappointing data out of China as well as the expectation that the Reserve Bank of Australia is done raising rates.

The minutes of the RBA’s August policy meeting will be watched when released early on Tuesday as they could equally provide some relief for the aussie or deepen its slide amid the lack of clear guidance about the prospect of additional rate increases.

However, the risk-off mood has started to ease during European trading hours with some major European bourses turning positive, the aussie paring its losses and the euro gaining marginally versus the US dollar.
Investors could be hoping that the worsening slowdown in China will prompt authorities to announce bigger stimulus measures in the coming weeks, although so far, there is no indication of a change in course from the current approach of targeted support.

Dollar continues to retrace July losses

Elsewhere in the FX sphere, the greenback touched a one-month peak against a basket of currencies before pulling back slightly, while the Japanese yen advanced modestly against most of its major peers.

Fading expectations that the Federal Reserve will hike rates again this year have not been able to keep the dollar down as the outlook for the US economy continues to remain more favourable than for other advanced economies. Last week’s consumer and producer price data painted a mixed picture on where inflation is headed. Treasury yields nevertheless rebounded towards their 2023 highs.

But this latest rally in yields is more likely being driven by the sheer scale of newly issued bonds by the US Treasury that’s expected to flood the markets over the coming months rather than revived bets of Fed rate hikes.

There should be some more clarity about the Fed’s rate path when the minutes of the July policy meeting are published on Wednesday. But before then, the latest US retail sales figures will be on investors’ radar.

Yen enters dangerous territory again

For the yen, the timing couldn’t have been worse as Japanese yields are unable to keep up with US ones even as the Bank of Japan has adopted a more flexible approach to its yield curve control policy.

With few signs yet of rampant wage growth in Japan, investors are convinced the BoJ’s shift to policy normalization will be very gradual and further currency intervention cannot be ruled out. This could be keeping traders on their toes as they flirt with the 145-yen level again. The dollar momentarily hit a nine-month high of 145.22 yen earlier today, however, there could be support for the Japanese currency from domestic Q2 GDP numbers due tomorrow, which are expected to show another solid quarter.