Thursday, January 07, 2016

Markets in Turmoil - 2016 edition :)

So, when I wrote on Tuesday that China faced a potential currency crisis I didn't think that it might unfold THIS WEEK.

While things have settled down a bit overnight here is a quick summary of what is happening and why you should care.

1) China's economy is faltering.
2) Their currency does float vs. other currencies but only based on a once daily exchange rate.
3) Last night they adjusted the exchange rate by 0.5%
4) Say you had 100 yuan (Chinese currency) worth of stock in company XYZ.  The devaluation means that instantly it is worth 99.5 in yesterday's yuan.

In normal markets sophisticated investors just hedge away this kind of currency risk.  However, the Chinese stock market is not normal and it has been overrun by small, first time investors.  The declines this week have caused the herds to race for the exits which are increasingly narrow.

For example, today their market opened, immediately fell 5% and was paused for a 15 minute break. When they reopened the markets fell to -7% for the day and that triggered a full day closure after just 14 minutes of real trading.  This is the second FULL DAY suspension of trading in the first 4 days of 2016.

The Chinese central bank has since intervened again to calm investors but I think their ability to control this market is limited.

Lately, the major activity in the markets has been occurring between 12am and 4am EST (humans need not apply) and the actual trading during the day has been less eventful.

By the time you read this, things will have probably swung wildly 2-4 times :)

It's feeling very much like 2008 all over again.

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