Markets In-Review: Markets Unstable On China Volatility

Sell-off in China's stock markets pulls equity down globally

• SSE180 records largest daily drop since January.
• S&P500 lost 0.9% during week
• European equity markets recorded significant weekly decreases, headed by DAX with 3.4% loss
• USD presents noteworthy strength vs. major currencies

On Thursday, the Shanghai SSE180 index suffered a large sell-off, sending the index to a 6.7% decrease, marking the largest daily loss for the index since January. SSE180 decreases translated to increasing fear in eastern Asia as a whole, with the Hong Kong Hang Seng Index decreasing by 2.2% and the Nikkei 225 adding a mere 0.4%, after trading at around +0.7%, through most of the day’s session. The decrease translated to a rather volatile Friday session for the SSE180, with an intraday low of about 3.4%. Eventually though, this concluded with a rather modest -0.2% daily loss, or 3.1% during the week as a whole.

The Chinese markets' instability follows concerns, by regulators, that the markets have lately been used for speculation, rather than investment purposes. This was said to translate to Chinese brokers tightening their margin lending requirements. Potential downside for the SSE180 is further augmented considering that the turbulence in the SSE180 follows a very nice period for the index, as even after the recent negative week, it is still at nearly a 34% year to date gain, or more than double the value it were a year ago.

Negative sentiment augmented as macro data fails to shine

Macro indicators of the week have been sub-optimal. The second estimate for U.S. GDP slid to see a 0.7% Quarter over Quarter Contraction, from a preliminary 0.2% increase. Duly noted, the effect on the market was somewhat limited as the analyst consensus for the print expected an even worse 0.9% contraction. Further on the negative side, May's Chicago Purchasing Mangers' Index fell, on Friday, to a level of 46.2 points, from a previous print of 52.3.

As for currency markets, the USD recorded an impressive strengthening in the beginning of the week vs. the Euro, with EUR/USD losing close to 1.3% between Monday and Tuesday. The trend has, however, flipped for the rest of the week, ending with the USD strengthen vs. the Euro by a modest 0.2%, on the week as a whole. The USD's more was more persistent vs. the Yen, with USD/JPY adding 2.1%. Similarly, GBP/USD decreased 1.3% during the week.

The cumulative effect of a negative opening of the week and Chinese decreases has resulted with the S&P 500 losing 0.9% during the week. The Dow lost 1.2% and the NASDAQ decreased by 0.4%. European markets are significantly worse off, with the DAX losing no less than 3.4% weekly, the CAC 40 decreasing by 2.6% and the FTSE concluding the week 0.7% lower.