Asian Markets Plunge

Asian Markets Plunge

“Alright boys, you may stride forth and massacre them with gay abandon.”

“But Sire!”

“What is it?”

“How shall we be able to tell the heretics from the true believers?”

“Just kill them all. The Lord will recognize his own”

Papal legate Arnaud-Amaury, Cistercian abbot-commander of the crusader army explaining to his officer Ceasar of Heisterbach

how to deal with the inhabitants of Bézier, AD 1209

Equal Opportunity Massacre – A Whiff of 1997

Overnight in Asia, one may have been excused for believing the ghost of Arnaud-Amory had returned, this time commanding the legions of investors doing business across the continent.

Who would have thought that the action in China’s stock market would attain such prominence and influence one day? This is precisely what seems to be happening now. The Shanghai Composite Index continued its ugly breakdown from a triangle, in the process confirming that it doesn’t respect any previously identified lines in the sand:

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There was lateral support at 3,400 – but the index simply moved through it with a gap

According to Reuters, a whiff of 1997 Asian crisis is in the air, and apparently traders in China weren’t overly happy that no additional reserve requirement cuts were announced over the weekend (there always has to be a reason for why things are happening after all…):

Asian stocks slumped to 3-year lows on Monday as a slide in Chinese equities gathered pace, hastening an exodus from riskier assets as fears of a China-led global economic slowdown churned through markets. […] Safe-haven government bonds and the yen rallied on the widespread unrest in financial markets, set in motion when China sharply devalued its yuan and stoked fears about the state of its economy.

“Markets are panicking. Things are starting look like the Asian financial crisis in the late 1990s. Speculators are selling assets that seem the most vulnerable,” said Takako Masai, the head of research at Shinsei Bank in Tokyo.

Stock exchanges from Japan to Indonesia were hit hard as Chinese shares slid from the open on Monday after Beijing offered no big policy move at the weekend to support equities, as was widely expected after last week’s 11 percent plunge.

Shanghai shares dived 9 percent to a six-month low, wiping out this year’s gains.  “The market is in a downtrend. There’s no good news, stocks are still expensive, and there’s no fresh money coming in,” said Qi Yifeng, analyst at consultancy CEBM.

“With no RRR (reserve requirement) cut over the weekend, the market will directly head south.”

There is some truth to the notion that the action is faintly reminiscent of the Asian crisis of 1997 – 1998. In 1994, China devalued the yuan quite a bit. This was followed by a very sizable devaluation of the Japanese yen between 1995-1998, while a number of other Asian countries had tied their currencies to the US dollar. These pegs proved unsustainable and beginning with the devaluation of the Thai baht, the crisis took its inevitable course.

This time the yen was the first currency to devalue. Readers may have noticed that global trade has been in dire straits ever since currency devaluations have been set into motion all over the world with the decision to quantitatively ease the yen into oblivion in 2011/12. This is no coincidence. One cannot devalue oneself to prosperity – this preposterous and misbegotten idea has been refuted theoretically and disproved empirically countless times throughout history. Another practical example showing that it simply doesn’t work is being delivered to us right now.

The gaps noticeable in the Shanghai Composite above have been replicated in Japan’s Nikkei Index, which looks downright ugly by now:

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Japan’s Nikkei Index – a series of gap down moves – the first line of lateral support has been taken out by this market as well as if it weren’t there

Naturally, the yen loves this action and has been rising smartly – but not by as much as one might perhaps have expected.

The yen begins to strengthen as the Nikkei sells off and “risk off” becomes the watchword everywhere

Other Asian stock markets, such as those of Singapore and Taiwan by now look rather severely oversold in the short term. As an example take a look at the Taiwan Weighted Index, which is back at levels first seen in the mid 1990s:

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The Taiwan weighted index has become extremely oversold and has plummeted to levels first seen in 1995

Given that both emerging market currencies and stock markets are plunging in unison, many of these markets are actually beginning to look quite cheap, at least on a relative basis. However, one never knows how bad a panic will become before it gets better, so it remains to be seen when some technical evidence of a turnaround will emerge.

Conclusion

Although China’s small devaluation of the yuan was per se neither especially large nor a wanton act – after all, the PBoC merely allowed the yuan to more closely reflect the market’s assessment of its proper exchange rate – it has apparently rung a bell of sorts.

Suddenly investors everywhere are seemingly recognizing the parlous state of the global economy – which is not only quite weak, but incidentally drowning in debt as well. The times have all of a sudden become “interesting” – in the Chinese curse sense.

Charts by: BigCharts, investing.com