Growth Fears in China Continue to Weigh on Global Financial Markets

Another China-induced day of volatility for financial markets after the PBoC cut its yuan reference rate for the eighth consecutive day and the most since August.  The move prompted another 7% fall in the benchmark Shanghai index, triggering a circuit breaker which after being open for just 30 minutes, halted trading for the second time this week.  Global equity indexes, other regional currencies, and oil prices were all under pressure in sympathy, with WTI crude hitting $32.10 a barrel, a 14-year low.  Beijing’s attempts at stabilizing the market have so far been considered counterproductive/ineffective.  The new equity circuit breakers that were implemented on Monday have been criticized by analysts for intensifying share declines as investors flock to exit positions before trading is halted.  China’s securities regulator later suspended the new circuit breaker system, indicating they may already be considering changes to the new system.

Adding to market jitters, famed investor George Soros warned that he sees similarities between the conditions currently causing volatility in financial markets and the 2008 crisis.  Soros said China is struggling to find a new growth model and by continuing to devalue its currency, it is “transferring problems to the rest of the world”.  At the same time, the developing world is struggling to return to positive interest rates.  In fairness, Soros previously characterized the Greece-led European debt crisis as “more serious than the crisis of 2008”, but given his long term investment track record, his characterization of the situation certainly warrants attention.

In the US, economic data continues to point to a firming labor market.  Following yesterday’s better-than-expected ADP employment data, separate reports showed jobless claims declined last week, holding below 300,000 for the 44th straight week, and layoffs in December were the smallest in over 15 years.  Investors will look to tomorrow’s release of the December nonfarm payrolls report to calm fears over the US economy and potentially provide some relief for U.S. equity markets.   In the meantime U.S. swap and Treasury yields are generally flat today, but down 10-15 basis points year-to-date.