Bond Rout Sparks China Sell-Off

By Glenn Dyer | More Articles by Glenn Dyer

The ASX is heading for a sharp fall when trading resumes this morning after Chinese stockmarkets fell sharply yesterday, suffering their worst day for 17 months.

The overnight futures trading has a 18 point loss for the ASX 200.

Other markets were not impacted – commodities held out, especially iron ore which is now trading well above $US67 a tonne.

That puts it up more than 8% in the past two days and over 15% for November so far.

The futures losses will out weight whatever positives flow from the sharp rise this week in iron ore prices. The ASX 200 was flat yesterday at around 5986.

Chinese stockmarkets all fell between 2% and 3% yesterday, and Chinese bond yields jumped for yet another day with the key 10 year rate topping 4% before easing in late trading.

The Metal Bulletin iron ore index price leap 3.9% to $US67.69 a tonne on Thursday after a 4.3% rise on Wednesday (and a sharpish drop on Tuesday!

The rally seems to be a result of the push to control pollution this northern winter in the industrial areas of northern China.

Iron ore imports demand has eased, but not by as much as forecast because result is that mills are using more higher grade, less polluting imported iron ore to maintain output.

Global markets were disrupted by the Thanksgiving holiday in the US and holidays in Japan. Gold eased a touch to around $US1,295 a tonne, but US oil futures jumped to regain the $US58 a barrel level.

Interestingly, the sell off in China failed to have an impact elsewhere (unlike on previous occasions). European markets were mostly firmer as activity indexes showed the eurozone economy is booming.

Last week, five regulators led by the People’s Bank of China (the central bank) unveiled the toughest rules yet designed to curb shadow banking.

The new rules will restrict banks’ ability to buy bonds with borrowed money and to lend to corporate clients through off-balance-sheet channels. The rules will reduce demand for bonds directly and could also hamper economic growth and corporate earnings via tighter credit conditions.

There are also fears the rules could smack speculative activity in the country’s commodity futures markets, which would in turn hit the prices of commodities like gold, copper and iron ore. But there was no impact yesterday.

The CSI 300 index, which tracks the largest companies traded in Shanghai and Shenzhen, closed 2.9%, the worst one-day loss since June 2016. The benchmark is still up 24% for the eyar so far.

The startup-heavy ChiNext gauge lost 2.8% while the Shanghai Composite Index closed with a loss of 2.3%.

The Shenzhen Composite, home to manufacturing and tech companies, is now negative territory for 2017, a sharp contrast to the double-digit gains and multiyear or record highs achieved by many Asia markets.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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