Yuan's Swerve and Fed's Minutes Worry Markets Amid Economic Uncertainty

The authorities have given a swerve with the yuan in 24 hours that has created insecurity among investors. At the same time, the drums of its economic weakness after the covid hit are getting louder.

Wall Street closed last night with moderate falls after learning the minutes of the Fed’s June Federal Open Market Committee (FOMC) meeting, which reflected how the decision to pause rate hikes was not to everyone’s liking the members. This nuance generates uncertainty and prospects for further tightening. This led the two-year US bond to approach 5% and the 10-year Treasury notes to close to 4%.

If this framework already predisposed to a certain weakness in the Asian stock markets, the news about China has made it worse. First, the People’s Bank of China (PBoC) has come out in support of a weakening yuan just one day after asking investors to reassure themselves of the currency’s weakness.

In particular, the central bank has extended support for the yuan through a stronger daily benchmark rate a day after the bank’s state newspaper published a comment saying the country has plenty of tools to stabilize the ailing currency. . Other efforts to prop up the yuan have included the decision by China’s biggest banks to cut rates on the $453 billion in dollar deposits held by Chinese companies, the second cut in a matter of weeks.

The PBoC set the yuan’s reference rate at 7.2098 to the dollar on Thursday , 360 pips above Bloomberg ‘s median estimate , the biggest difference since November. The peg limits the movements of the onshore yuan (traded in China) to 2% on either side.

On the other hand, the conclusions of Goldman Sachs analysts after speaking with local Chinese investors have not pleased the markets. The common reading is that China’s top leaders are likely to hold back from aggressive stimulus or major economic reforms at a key meeting scheduled for later this month.

The Politburo meeting in July traditionally sets the tone for economic policy for the second half of the year. Investors will closely watch this month’s meeting for clues as to whether Beijing will take decisive action to boost growth.

The economic recovery is running out of steam amid renewed weakness in the housing market, deep local government indebtedness, record youth unemployment, sluggish household and business confidence, and tense geopolitical tensions. The data that was known at dawn this Wednesday deepened the trend: the activity of Chinese services weakened in June, according to the PMI Caixin , which grew at the slowest pace in five months. The composite indicator (manufacturing and services) fell from 55.6 to 52.5 points.

Finally, investors have also had to digest the news that Chinese banks have stopped buying bonds issued in the Shanghai free trade zone after increased regulatory scrutiny, in a development that hurts government financing vehicles. local.

Hong Kong’s Hang Seng Index shed 3%, while Japan’s and Australia ‘s indices fell more than 1%. US futures were down more than 0.4%, compounding losses for the S&P 500 on Wednesday . The Euro Stoxx 50 contracts also fell, opening after the continental index with falls above 1% , the same as the Spanish Ibex 35.