China is tightening its grip on the financial markets, acting from different angles, and these moves impact the entire financial system.
Officials are promising harsh penalties for price rigging and spreading misleading information on spot and futures commodity markets after a meeting with steel chiefs at the weekend. This is a new move to cool the boom in raw prices, which caused a 7% drop in iron ore value at the start of trading on Monday.
China is also taking new steps to restrict crypto mining in the country and financial operations in cryptos. As well as dealing a blow to cryptocurrencies, the latest moves could result in a drop in energy demand.
Interestingly, in the 2000s, China was also a deflationary exporter due to cheap labour and economies of scale. But that was natural end-price deflation. Now the Politburo is aiming to control prices in the earlier stages.
There is also no getting around the psychological effect: overheated commodity markets are shrinking from so much regulatory scrutiny from one of the largest and fastest-growing raw material and energy consumers.
Potentially, this attention from China on financial markets may be a cause for caution, as it creates serious downside risks that could materialise at any moment.
On the other hand, long-term traders understand that the market is taking its toll. Even the largest economies have not been able to withstand the sustained pressure of free markets.
On balance, we see a subdued market sentiment in recent days. There is a general lull and cautious optimism in stocks. It is enough to push equities away from local lows but not enough for a new rally.
The currency market is not giving clear signals either. USDCNH and AUDUSD have stabilised in narrow ranges near recent extremes.
EURUSD has been gaining support on the downside towards 1.2160 since last week and is not giving up any sustained attempt to move above 1.2200. GBPUSD made a second attempt to consolidate above 1.4200 but pulled back amid market caution to last week’s close.
EURUSD and GBPUSD movement from their local highs could manifest risk demand and predetermine further market dynamics from current levels.