East during New Year season

According to the analysts' assessment, the Chinese stock market still has to fall by another 40% to its "fair value"

Finally, this dangerous week, when all the news seemed bad, has ended. A new panic caused by the fall of yuan exchange rate and the collapse of Chinese shares is going on. There are no strong fundamental reasons for termination of the stock exchange panic yet. Perhaps, it has been twenty years or so since a new market year started that badly. The global stock markets lost 2.3 trn dollars as the response to the fall of the Chinese economy and devaluation of yuan. Investors dumped risk assets on the first market day after the new year holidays.

Today, markets are fearful of growth caused by statistics that appears to be good. Last week, Chinese stock exchanges were forced to stop operation twice, as the result, this mechanism was discontinued, and further, the market was falling without any hindrances. According to the analysts' assessment, the Chinese stock market still has to fall by another 40% to its "fair value"; however, it depends on the actions taken by the Chinese authorities at what rate it will happen - any decrease of rates will be seen as strong support.

The China Securities Regulatory Commission introduced 1 per cent cap on major share sale; at the same time, they should be sold only by way of competitive offers and must have a sales plan 15 days prior to sale. However, the new rules do not mean that China Securities Finance Corporation that buys shares in the stabilization periods will leave the market.

American and European politicians reacted actively to the conflict between Saidi Arabia and Iran because modern Western politicians see Saudi Arabia as a faithful ally and try to grab a piece of the "oil pie" on the Iranian market, meanwhile.

Apart from China and oil, the following events of the previous week should be noted:

  1. The EU regulator has introduced the rules that relate to the finance mechanisms such a REPO, operations of securities loan and margin crediting that will come into force on Tuesday. The provisions of Securities Financing Transactions Regulation will require the clients and authorities to disclose such operations as well as force intermediaries obtain consent, if they intend to use securities with specified yield level.
  2. The FRS Protocol has not provided any new information, there are no hints to the next rate increase at the nearest meetings, the statements made by the Committee members became more aggressive.
  3. The record-breaking loss incurred by the Swiss National Bank by the results of 2015 will be 23 bln Swiss francs (USD 23.3 bln), franc has showed significant weakening, USD/CHF pair started the week with some growth and has perspectives for purchases.
  4. The fall of Dow Jones Industrial Average was caused particularly by the news of the upcoming closing of the largest Aluminum Company Alcoa, which is one of the key corporations.
  5. The report regarding the labor market came out as quite strong: 292K of new jobs; however, if about 58K were comprised of temporary employment, then considering seasonal adjustment, we can assume real growth by 230K. In any case, taking into consideration the revision of the previous months by 50K, the growth of employment remains significant. The report looks ideal for the growth of stock markets; however, speculators fled to risk-free assets because of the Chinese session dynamics on Monday.
  6. The situation in North Korea and the break of diplomatic ties of OPEC member countries with Iran continues to put pressure on oil, and the chances for settling of the problems of large players on the raw materials market are meager at the moment.

We will note the following from the events of the upcoming week:

  1. On Tuesday, against the background of the morning negative statistics, dramatic movements regarding Japanese yen will be possible as a response to Haruhiko Kuroda's speech.
  2. Merkel and Draghi's meeting regarding the Eurozone issues has been planned for January 15 ("a regular meeting for discussion of general issues"). Most likely, Germany will want to coordinate with Draghi the required cessions to Great Britain; however, the meeting will be likely to include the discussions of the monetary policy, decrease of exchange rates, and the expansion of QE. Public disclosure of information regarding the meeting will hardly be possible; however, the leaks of separate pieces of information will definitely influence EUR/USD.
  3. Mark Carney's speech before the Bank of England's decision regarding interest rates can trigger strong adjustment of pound exchange rate with the help of EUR/GBP; however, pound has too much negative now, therefore, the long-term influence of this decision is doubtful.
  4. The statistics from China on Wednesday morning will have special significance. If the panic on stock exchange does not calm down by the end of the week, it is not impossible that the Central Bank of China will have another decrease of rates; in this case, we should expect the recovery of stock markets. In any case, a chance for growth or, at least, for serious adjustment remains, which must strengthen the tendency of the fall of euro.
  5. Also, it is planned to hold an intermediate ECB meeting on Wednesday morning; some inside may be leaked to the press from internal sources. Usually, at those intermediate meetings, those particular "preliminary "decisions that will be submitted to the main meeting consequently will be adopted. On Thursday, the Protocol of ECB meeting as of December 3 will be published and, judging by the fact that Draghi was not satisfied with the market response to this meeting, the text will likely have surprises.
  6. On Thursday, Draghi and Coeure will work at the Eurogroup meeting, no public statements will be expected, however, the press may publish some harsh comments.
  7. The information regarding the US retail sales with the prediction for value decrease by two may well adjust the growing dollar trend. Traditionally, the US stock market must grow at the beginning of the year before the upcoming annual reports, and a reversal is possible only at the end of the month after the publication of the data regarding the largest corporations. We should follow the publication of S&P reports - in case of negative reports, escape form risk is more likely on Tuesday.

Consistent technical levels are seen only regarding EUR/USD so far: mid-term neutral zone: 1.0830-1.0940 (and one more higher: 1.0970-1.1060). Close resistances: 1.0885/1.0915/1.0920/1.0940. Near principal support: 1.0860, in case of penetration 1.0823/1.0804/1.0784 will be relevant. Level 1.0700 looks very "strong". Trade above/below will speak about the priority of corresponding risks. Now, euro will take into consideration one and all regarding quotes - from gloomy general-market sentiments to Asian risks; however, in general, it is still slumbering and will, most likely, wake up after the ECB meeting by the time of Mario Draghi's January 21 press-conference.

Author: Alexander Ward,
ForexChief Currency strategist