This is How China is Moving US Markets

This is How China is Moving US Markets

With a fast developing economic situation between the US and China gripping markets, we take a look at the data to see where it is having an impact.

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Chinese markets are in an intense state of flux, as two nights ago markets sold off more than 3% and last night the Shanghai composite was down nearly 1.5%, before rebounding sharply.

Why the U-turn last night?

Referred to as 'verbal stmulus', the catalyst for the sharp upside move was a coordinated wave of messages from the government that sought to assure investors that the government would stabalize markets and stimulate the economy.

Over the previous 21 days, the China A50 is off 10%, yet last night it rallied about 4.7% in total.

chart built by Jason Pfaff in TradingView


One rally is not going to be enough, however.

Concerns continue to build, as last night markets also received the latest round of GDP data from the country.

Growth slowed to an annualized pace of 6.5%, the slowest since 2009.

With disappointing economic data, and an intensfying trade dispute with the United States ongoing, it is hard to see where a positive injection of sentiment emegerges from.

How will markets digest disappointing news and data from the worlds second largest economy and what impact will it have?


What Impact is China Having on US Markets?


One lesser reported data set from this week was the report from the United States Treasury on the volume of US Treasuries held by foriegn countries.

China remains the largest holder of US Treasury notes, but over the last 12 months they have decreased ther holdings by about 3%. Given the fact they hold over 1 trillion, and due to the US issuing more debt than ever with the impending budget deficit, a decline in Chinese holdings with have a meaningful impact to demand for government bonds.

When bonds have less demand or selloff, their yield rises. 

As the equity markets in the US have sold off recently, one factor pointed to as a possible cause is the rise in yields on the 10 year Treasury.


Candlesticks = NASDAQ / Blue line = 10 year Treasury Yields

chart built by Jason Pfaff in TradingView


While it would be impossible to pinpoint the exact timing of how and when the Chinese are unwinding portions of their US debt holdings, what remains clear is they have less demand, which puts upward prssure on rates.

And recently, rates moving up has put pressure on markets.


Soybean Market Impacted by Trade Issues

Another market deeply affected by the ongoing trade tensions between the US and China is the soybean market.

This week, China forecast important 4-6 million less tonnes than last year of soybeans, which puts downward pressure on price for US farmers and others. With a well supplied markets and the largest consumer stepping down their imports by about 25%, soybeans could continue to be under pressure for sometime.


chart built by Jason Pfaff in TradingView


What's Next For China?

Reports are surfacing that President Xi and President Trump, leaders of the worlds two largest economies, could get together at next months G-20 summit.

If there appears to markets to be positive momentum towards a trade deal, that could certainly be a positive catalyst for markets. 

Until then, with weak economic data, and a shift in purchases of both bonds and imports, China will continue to weight on US markets, and keep trading potentially volatile.

If last night is an indication, the Chinese will try and do all they can to support markets until then. However, it remains to be seen if it is enough, given some of the damage we have already seen.

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