The big sell-off in the Aussie dollar and stocks overnight and the associated rally in gold was in large part a consequence of weak data in China yesterday and concerns that the reformist Government in Beijing is going to engineer a credit crunch and slowdown as it tries to rein in excess and waste in the economy.
But a note from the ANZ’s research team authored by Patrick Perret-Green yesterday highlights that concerns over China have been growing recently and might be near a pessimistic tipping point as its CDS heads to 100.
Perret-Green highlights that the “macro markets background look to be deteriorating” on the back of the softer Chinese HSBC PMI and recent US data while at the same time emerging markets continue to be pressured with the Turkish lira, Russian ruble and South African rand all making fresh lows against the USD. Add in last night’s moves on currencies like the Aussie dollar and Argentinian peso and we have a serious deterioration in sentiment right now.
Turning directly to China, Perrett-Green says “we have first flagged our concerns about China a back in November when its 5y sovereign USD CDS was at 65bp. Over the past week it has risen another 10 basis points to 99bp and is at levels last seen in early September.”
He also notes that “even previously solid developed market credit has started to crack”.
The GFC was a credit driven event and each of the big ructions in markets and the economy since has also been in some way related to credit.
This just might be the canary in the global market’s coalmine.