A look at the day ahead in Asian markets from Jamie McGeever
The fear and fragility sweeping global markets can be summed up by a 50-year old quote on the dollar from the then U.S. Treasury Secretary, and the popular investor maxim about catching sharp kitchen utensils obeying the laws of gravity.
“The dollar is our currency, but it’s your problem,” John Connally told his G10 counterparts in November, 1971.
What was true then has rarely been more relevant since, as the dollar’s rip-roaring rally on the global currency markets leaves a trail of destruction in its wake. The spotlight on Monday fell on London and Beijing, but where is next?
The UK’s market mayhem is front and center for world markets, but has a particular impact on Asia via FX reserves. Some $625 billion global FX reserves are in sterling, most of it probably in gilts. Asian central banks are large reserve holders – and gilts and sterling are getting clobbered.
China’s central bank, meanwhile, said on Monday it would raise the currency risk reserves for financial institutions when purchasing FX in the forward market to 20% from zero. The yuan still fell to a two-and-a-half-year low.
“Don’t try to catch a falling knife,” is sound, if blindingly obvious, advice for any market participant. With almost every financial asset and market bar the dollar selling off, most investors will be clinging to it for dear life.
World stocks have fallen five straight days, and nine of the last 10. Some $23 trillion of market cap has been lost this year. Is anyone willing to try and catch that knife?
Global financial conditions are the tightest now since 2009, according to Goldman Sachs. With the dollar and U.S. bond yields still marching higher, and the slide in world stocks gathering pace, conditions will likely deteriorate before they improve.
Key developments that could provide more direction to markets on Tuesday:
South Korea consumer sentiment (September)
Japan services PPI (August)