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January 11 2016

Nutmeg: Today’s volatility caused by oil collapse, yuan fears, bungled circuit-breakers

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Nutmeg Chief Investment Officer Shaun Port says:

“What is causing global market volatility today? We see three causes, two from China.

“First, Chinese exchange rate policy. We don’t know what floor the PBOC has set for the yuan, so investors fear a large, disruptive devaluation. We see this fear reflected in the discounted offshore yuan trade. Better expectation management about the yuan’s target value might settle market sentiment.

“Second, the new Chinese stock market circuit-breakers are too tight and too close together for volatile Chinese equities, and this exacerbated panic and sell-offs. Had these breakers been in place in summer, they would have been triggered 20 times.

“Third, as the commodity super-cycle (2002-2007) and the EM outperformance (2003-2011) both unwind, we see a massive over-supply of oil (from Saudi, Iran) with no marginal buyer. This helps big net crude importers like Japan, but threatens oil-exporting EM economies, and hurts investor sentiment.”

Outlook

“Investors do not understand Chinese policy, and fear the very worst; global sentiment is in tatters.

“But fundamentals remain intact. Unlike in developed markets, Chinese stock prices have little influence on consumer spending, so the economic impact is marginal. Globally, prospects for developed economies are actually looking a bit brighter.

“However, we need to be prepared for the Chinese market to fall sharply, even from these levels.”

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