Global stock markets were Shangai’ed again today. The second Chinese stock crash this week led to circuit-breakers halting trading less than a quarter hour after markets opened in Shanghai, where stock again fell by over 7%. After a 15-minute break, the market fell a total of 7.2% before it was shut for the day.
After the break, Chinese asset managers rushed to the exits liquidating their entire holdings because of a separate pending regulation limiting their ability to sell if shares fall further. Starting on Sat., funds and large investors will be allowed to sell only 1% of their total holdings during the next 3 months.
So Chinese funds this morning engaged in “preventive liquidation†of their entire portfolios, according to Bloomberg.
The yuan currency hit another new 5 yr low. The attempt by Beijing to interfere with markets and control selling was the primary cause of the rapid decline in share prices today. China, a Communist country, is trying to regulate and boost stock markets by executive fiat. This has perverse effects.
The resulting chaos took down other markets with Euro stocks down 3.6% and the FTSE off 2.6% although it recovered later to minus 2%. This pushed Wall Street into the red by 150 points before the opening. However the dollar is on a rise. And again the search for a haven has resulted in a boost to the price of gold.
Among the hard-hit currencies is the Mexican peso which fell to an all-time low against the dollar, at 17.4675 overnight. Other oil and energy producers, like the Northern peso Canadian dollar, are also off sharply. Some of this $ strength is the result of panic over geopolitical trends rather than mere yield-chasing and I expect it to reverse, but don’t ask me when.
Beijing must reform its circuit-breaker and intervention systems to stop trying to boost stock markets with edicts. Common sense, and rational incentives rather than Marxist-Leninist-Maoist doctrine would led markets be markets.
A Tobin or transaction tax may be imposed by Iceland to prevent the “carry trade†to stop foreign investors buying Icelandic government bonds to get its 5.75% interest rate. A carry trade borrows a low-yield currency to place the money at a higher rate. About a quarter of Iceland’s krona bonds are owned by foreigners.
Yesterday’s Wall Street Journal reprinted an AP article about American Future Systems, publisher of business newsletters. AFS was fined $1.75 mn by the US Dept of Labor for violating the Fair Labor Standards Act. American Future employees were not being paid the $7.25 minimum wage because they had to clock out for short breaks to use the toilet. At least one contributor had the idea of offering me an affidavit stating that his free-lance contributions are paid for at current market rates.
