It appears that the new Chinese circuit breakers came at just the right time as the Shanghai equity markets triggered a halt on Jan. 7, leading the Far Eastern power to close down the markets altogether after just 30 minutes of trading. This is the second circuit breaker halt in three days for China, which implemented the market protection at the start of the new year.
What appears to have been the catalyst for this market collapse was a devaluation of the Yuan, which was dropped by the PBOC the most since last August.
Following the collapse of offshore Yuan to 5 year lows and decompression to record spreads to onshore Yuan, The PBOC has stepped in and dramatically devalued the Yuan fix by 0.5% to 6.5646. This is the biggest devaluation since the August collapse. Offshore Yuan has erased what modest bounce gains it achieved intraday and is heading significantly lower once again. Dow futures are down 100 points on the news.
PBOC fixes Yuan at its weakest since March 2011… with the biggest devaluation since August – Zerohedge
European and U.S. markets are feeling the brunt of China’s chaos, with the Yen dropping to the 117 handle versus the dollar, and U.S. futures declining to -160. This of course followed a -250 point drop earlier today, and is forecasting the sixth day in a row in the red when you add the final two trading days of 2015.
In the end, this appears to be something much bigger than a global equity pullback as oil today fell to a 33 handle, and the lowest price in 11 years. And J.P. Morgan along with UBS both downgraded emerging markets, with one bank forecasting the start of a 30% decline and move into bear market territory.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.