The biggest story in the financial markets this morning is the weakness in Chinese assets.
The Chinese Yuan sold off aggressively, experiencing one of the largest one-day declines since December.
Chinese stocks were hit hard with the Shanghai Composite dropping more than 2.8%. Although a significantly weaker trade balance triggered the selling, China’s central bank has been actively allowing the Chinese Yuan to weaken.
Chaori Solar Energy was allowed to default on its corporate bonds ( as suggested some days ago ) and is currently in the process of “selling its solar farms” in order to pay up.
Markets “appear” calm here this morning in a general sense but don’t get too comfortable as this has got some pretty far-reaching implications.
Emerging Markets “EEM” continues its downward trajectory, as the Japanese Yen looks to steady / make a move higher.
Shakey ground here “globally”……but of course – no trouble in U.S Equities.
How’s “short AUD” looking now suckas??
The Ripple Effect: When China Sneezes, Emerging Markets Catch Pneumonia
This Chinese Yuan weakness isn’t happening in a vacuum. We’re witnessing a coordinated unwinding of the carry trade that’s been propping up risk assets for months. When the People’s Bank of China deliberately weakens their currency, it sends a clear signal: export competitiveness trumps currency stability. That’s a massive red flag for anyone holding emerging market positions.
The Chaori Solar default might seem like a footnote, but it’s actually the canary in the coal mine. China’s willingness to let companies fail marks a fundamental shift from their previous backstop mentality. This is structural change, not cyclical noise. The implications cascade through every risk asset from here to São Paulo.
The AUD Short: Textbook Risk-Off Mechanics
That “short AUD” call is playing out exactly as expected. The Australian Dollar lives and dies by Chinese demand, and when Beijing signals weakness, the Aussie gets demolished. We’re seeing classic risk-off behavior: money fleeing commodity currencies and hunting for safety in the Yen and Swiss Franc.
The correlation between Chinese manufacturing data and AUD strength has been rock-solid for years. Now we’re watching that relationship work in reverse. Every tick lower in Chinese industrial production translates to AUD selling pressure. This isn’t a dip to buy – it’s a trend to ride.
Yen Strength: The Unwinding Begins
The Japanese Yen’s sudden steadiness tells us everything about global risk appetite. When traders start unwinding carry trades, the Yen becomes the beneficiary. We’re seeing the early stages of a massive deleveraging cycle that could run for months.
Bank of Japan intervention becomes less likely when global risk sentiment is driving Yen strength rather than speculative attacks. This creates a perfect storm: USD weakness combines with risk-off flows to push JPY higher against everything.
U.S. Equity Disconnect: The Final Frontier
The fact that U.S. equities remain unphased while emerging markets crater represents the last bastion of American exceptionalism. This divergence can’t persist indefinitely. When Chinese growth slows, global supply chains feel the impact within quarters, not years.
We’re witnessing the early stages of what could become a full-blown contagion event. The Shanghai Composite’s 2.8% drop might seem manageable, but it’s the velocity that matters. Single-day moves of this magnitude in Chinese assets historically precede broader market dislocations.
The Trade Setup: Positioning for Global Slowdown
Smart money is already repositioning for a world where Chinese growth disappoints and market rallies become suspect. The trade here is simple: short risk, long safe havens, and prepare for volatility.
Currency pairs to watch include USD/JPY for downside breaks, AUD/USD for continued weakness, and EUR/USD for European contagion effects. The Chinese Yuan’s managed decline gives Beijing export advantages while creating headaches for every other emerging market currency.
This morning’s “calm” in global markets is deceptive. Institutional flows take time to develop, and the real selling often comes after initial weakness creates technical breaks. We’re seeing the opening act of what could become a multi-month theme.
The key insight here is recognizing that Chinese policy makers are choosing competitiveness over stability. That decision reverberates through every risk asset, every commodity, and every carry trade currently on the books. The dominoes are falling – the question is how many will go down before we find a bottom.
Hey Kong thanks for another update. I saw this article on the Shanghai Index earlier this morning and thought of you.
http://blog.kimblechartingsolutions.com/2014/03/shanghai-index-about-to-reach-a-tipping-point/
As you said: It’s crazy that it hasn’t really influenced US equities yet.
The “media spin” continues….as “all is well” in the U.S ( cough, sputter )….
China slowing is a given, and now consideration of a “very hard landing” starting to come to light.
But….just buy U.S Equities and everything will be O.K ( please don’t! )
Reminiscent of 2007??, when everyone was buying stocks and it just kept going up,up,up…
Every clown was a hedge fund manager…or stock market wizard….
This may very well push past anyone’s expectations in that…..the more people leaning “short” the more fuel to push things higher.
What’s that old saying “markets can remain irrational much longer than you can stay…..
Where’s a black swan when you want one?
…solvent! Haha. Yup short AUD looking like a nice set up. Friday produced a nice candle…maybe today is the retest and it’s on…..I hope. The US market is getting beyond boring though man. I’m moving to Japan where it’s a bit more fun
Kong – did you read this. Talk about terrorism…
http://www.zerohedge.com/news/2014-03-10/holy-grail-trading-has-been-found-hft-firm-reveals-1-losing-trading-day-1238-days-tr
We’ve all known this for a long time now….the big boys pay “big time” for a larger pipe” and are always ahead of price by a couple milliseconds etc…
Yes indeed the entire thing is rigged in that they see order flow / have computers that do just “front run” the entire market.
BUT……they can’t do much about anyone with longer term views / trading on larger time frames….this is why we “do what we do” here.
Looking to “intra day trade” is essentially a losing battle.
Hey Kong,
Sweet articles as of late. Quick question on your statement of HFTs…so by swing trading dailys we are staying away from the “noise” , aka the BS, from the big players? I love swing trading daily charts, which is what I hope you view as acceptable longer term?
Thanks
I think you’re fine when looking at daily cycles and “daily highs / lows” sure.
It’s the guy rushing into the market on an earnings report / pre market etc that generally just gets rinsed during a typical day in the NY session.
Daily swings…..what could the Wall St boys have on you? Now it’s just the Central Banks you need to watch out for…..
He he he……
Kong,
Looking at a weekly chart on nzd/jpy. Looks extended but nzd has been a beast. What are your thoughts?
NZD is a complete and total beast yes.
It’s risk off in the truest sense getting short this pair so…..you’ll have to “check you head” if you are willing / interested to fight the current “never ending pump” in risk in general.
I’m not touching it….not til I see some “serious” news / technical breakdowns of any number of things
You got to watch the chart of Dr. Copper to see how things really are. Same chart situation in Shanghai stock market, ready to breakdown in a second.
I see the EM bubble dancing on the razor’s edge in these minutes.
No more mega infrastructure projects in EMs with borrowed USD, no more new empty ghost cities in China, no more useless skyscrapers in Turkey. This hole thing could implode within 48 hours and breakdown to 50%.
But the market is rigged, and I guess the central banks are already in a telephone conference call to save the world hehe.
Burst Baby, Burst!
Copper’s fall has been amazing as “yet another reflection” of the woes in China and the trouble ahead….but of course – not really much of “that” hitting the media in the West from what I understand.
The fall in copper should literally be “front page news” as far as I’m concerned as yes…China showing “big cracks” and EEM heading lower, then lower.
I say we are literally “walking the razors edge here” but then again…..just ignore the fundamentals a while longer until the entire thing takes it’s dive.