Monday’s minor dips have extended into more substantial losses on Tuesday, with stock indices around the globe in the red after an unexpected policy change in China.
By Peter Martin
Wednesday, December 10, 2014
The decision about what types of bond can be used as collateral for certain loans has sparked concerns of a tightening in liquidity.
The China Securities Depository and Clearing Corp (CSDC) introduced new corporate bond restrictions late last night, meaning bonds of an insufficiently high rating are no longer acceptable as collateral for repo trading. A statement from CSDC claimed their action would have little effect, saying ‘As the bond and stock markets are relatively separated, the stock market should see no major impact.’
This appears optimistic given the upshot, which has been financial markets in a state of mild alarm. By early afternoon in New York, the leading US stock indices had recovered much of the day’s losses, but still remained in negative territory. The Dow Jones was down 0.65% or 115 points, having been off by more than 200 points earlier, while the broader S&P 500 Index weathered the storm better, retreating just 0.18% to 2056.7. Those losses reflected the weak performance of other stock exchanges around the world, with the UK’s FTSE 100 and the German DAX both plunging more than 2%.
Flight to safety
As usual, the decline in risk appetite was accompanied by strong buying into assets perceived as being less risky, such as gold, silver and the Japanese yen. This safe-haven buying pushed gold up 2.4% to $1232.4 a troy ounce and boosted silver by 4.6% to 17.12 per troy ounce. USD/JPY, meanwhile, fell 1.1% to 119.34, as the yen’s rally continued into a second day, the currency also strengthening against its other major peers.
US dollar weakness
Elsewhere in the forex market, the dollar suffered a broad decline on speculation that recent declines in energy prices, and the downward pressure exerted on inflation as a consequence, will offer the Fed the latitude to persist with accommodative monetary policy. USD/CAD slid 0.4% to 114.33, EUR/USD climbed 0.56% to 1.2387, while GBP/USD rose 0.13%, despite a surprise decline in UK industrial production. Dragged down by a 0.7% contraction in manufacturing output, total UK industrial production shrank 0.1% in October, compared to a consensus estimate for growth of 0.1%.
Though manufacturing is a relatively small part of the UK economy compared to services, it does tend to correlate to overall economy activity. That said, October’s minor decline in industrial output does follow a 0.7% jump in September (revised up today from the originally-reported 0.6%), so it is too early to conclude this is part of a trend.
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