Markets initially started the session sideways but this quickly changed as the Chinese government's website published an article saying it would curb excessive credit expansion. More specifically this meant over-capacity in manufacturing industries such as Steel production and Cement. Furthermore the government said it would increase guidance over parts of the coal, glass and power industries said the State council on their website. This, coupled with more strenuous controls on stock and bond sales are all measures the government hopes will put an accent on solid growth and cut out unnecessary credit expansion that could hinder the long term well being of the economy.
The IMF expects the Chinese economy to grow by up to 8.5% this year, while the worldwide figure stands at 2.5%. The market's reaction to this news was a very poignant one. As we mentioned in our newsletter yesterday, investors expected a return to risk aversion - the reasons are diverse, but mainly on the waning of the 'doping effects' of the earnings season. However, the Chinese release has maximized this effect; we saw a general rally of the Yen crosses (AUDJPY -1.28%, USDJPY -0.95%, EURJPY -0.96%). We expect some correction on last night's moves but the general theme is defiantly risk adverse.
While commodities have slumped on the back of this return to risk aversion, Gold has risen, most probably on fundamental demand as the global economy picks up. We do see a wedge forming - strong indication of an imminent directional move.
|G10 Advancers and Decliners vs USD|
R 2: 0.8520
R 1: 0.8475
S 1: 0.8125
S 2: 0.7925 USDCAD
R 2: 1.1347
R 1: 1.1225
S 1: 1.0793
S 2: 1.0633