China and South Africa attract the Negative Spotlight of Global Markets

Headlines range from Chinese stocks getting slammed lower as trading resumed from a week-long holiday, the Euro retreating on the news that the European Commission has expressed concerns about the Italian budget deficit and the South African Rand declining as much as 1% on reports that South African Finance Minister Nhlanhla Nene has asked President Cyril Ramaphosa to release him from his position. Other risks include the Oil markets behaving sensitively to the headlines that the United States might grant some waivers to Iranian Oil sanctions and attention remaining on Brazil following the first round of the Brazilian election. Let’s also not forget that a number of emerging market currencies across the APAC region resumed their position of pointing lower to begin the new week, while these same currencies might also face risks from the development that the Chinese Yuan has fallen to its lowest level against the Dollar in nearly two months.

All in all the early part of Monday has already showed that the combination of different themes and financial risks for markets could mean that this week is a nervous one for traders.

The largest takeaway due to its standing as the second largest economy in the world will be the movements in Chinese markets today. The latest round of selling in China can’t be dismissed and has resulted in Chinese stocks suffering their worst start to October in a decade. While some of the losses in China today can be attributed to the market playing “catch-up” to being absent from trading due to a week-long public holiday last week, it can’t be understated that Chinese markets as a whole are under tremendous pressure. The Shanghai Composite Index has lost 23.28% year-to-date at time of writing, which is double the losses seen in the German DAX during the same period at 11.15%.

Away from the brutal headline that the Shanghai Composite Index lost 3.7% on Monday, the implications that this has on other equity markets across the globe will be what traders are watching next. We have seen a trend in the past where weakness in China has resonated to other global markets, and we did encounter selling throughout the Asian region to begin the week.

The trend of weakness in China has come in spite of the PBoC cutting the RRR requirement for the fourth time in 2018 over the weekend. I wouldn’t say that the latest monetary policy action from the PBoC is the reason behind the selling in China, but it has opened up suggestions that policymakers might be concerned over signs of slowing momentum for the Chinese economy. These concerns can also be seen in the offshore Chinese Yuan, with the USDCNH advancing above 6.90 for the first time in nearly two months.
If the Yuan continues to ease from this point, it does paint a picture of more possible pain for emerging markets across the globe this week.

The initial selling reaction in the South African Rand on reports that its Finance Minister has asked to be sacked will encourage investor caution that South Africa could be in store for another round of political risk. Of course, South Africa is no stranger to political headlines but the initial concern could be that the reaction in the Rand to a possible replacement of its finance minister could be similar to what sparked a severe sell-off back in March 2017.

When you consider that the removal of respected Finance Minister Pravin Gordhan all the way back in March 2017 was part of a wide cabinet reshuffle from the unpopular ex-President Jacob Zuma you can’t really compare the news of then and today so closely. I would instead monitor to see how this report develops before becoming concerned that another Rand slump could be upon us due to internal political risk.

The South African economic calendar for this week is mostly thin in volume when it comes to tier-one releases until Manufacturing Production numbers for Thursday, where economists will be closely looking for signs that the economy could exit its first technical recession since 2009. Away from political developments I would look to see if the Rand reacts to any global uncertainties, specifically the sharp sell-off in Chinese markets and whether this spreads into other emerging markets.