24 Oct 2013
Chinese banking headline catches over-positioned market on the wrong foot
FXstreet.com (Barcelona) - The big story making the headlines on Wednesday, which led to an unusual rampage of liquidation on Yen shorts along the last Asian session, were news that the Chinese banking industry was facing an increase on the recycling of bad loans, as these went up over $4 billion vs $1.5 billion a year earlier, raising fears of some tiny defaults.
Insignificant news triggering big moves a reminder markets are not logical
The article carrying the headline, published by Bloomberg, could read "Top China Banks Triple Debt Write-Offs as Defaults Loom." While at first glance it may sound like a 'creepy' headline, once the information was read and digested, once could not help but notice that the story alone was clearly not that 'chaotic'. Instead, the market consensus at this point seems inclined to think that an over-reaction by the market was behind the sharp reversals wiping out gains in riskier assets post NFP.
According to Ryan Littlestone from Forexlive: "The numbers involved (around $4bn) are peanuts in the Chinese banking sector which posted H1 profits of over $76bn. Also Chinese authorities seem to be well on top of making sure banks have appropriate provisions to legislate for bad debts. Non performing loans amount to only 1% of total loans. Banks are asked to keep reserves of a minimum of 2.5% of total credit and there have been calls to raise that amount.·
Elaborating further on the Chinese default concerns, Littlestone added that "reducing or writing off non performing loans is a natural feature to nearly all global economies but is a fairly new process in China, but the US, UK and Europe have been creating toxic banks to palm off bad debt, and China is a long long way from that."
A complacent market gets burnt out
While some HFT-led moves may have kick-started the snow ball, as the headlines contained the magic words “China”, “banks” and “default”, coupled with complacency on carry trades - led to an immediate sell-off in the Shanghai stock exchange, immediately followed by a carnage of Yen shorts, Aussie, Kiwi longs - an over-positioned and complacent market seems to be the most accurate conclusion if one is to make sense of all the hysteria hitting the past Asian session.
Some argue whether or not it was a coincidence that currencies such as the AUD/USD were at a crossroad facing the 50% fibonacci retracement area from the 2013 bearish extension, although Littlestone throws cold water to that theory, noting "I think it’s coincidental that various currencies were at the top. I think that was a reason the sell off was so intense as there were probably plenty of positions bought up top and plenty of bids a reasonable distance below looking for an intraday dip."
Insignificant news triggering big moves a reminder markets are not logical
The article carrying the headline, published by Bloomberg, could read "Top China Banks Triple Debt Write-Offs as Defaults Loom." While at first glance it may sound like a 'creepy' headline, once the information was read and digested, once could not help but notice that the story alone was clearly not that 'chaotic'. Instead, the market consensus at this point seems inclined to think that an over-reaction by the market was behind the sharp reversals wiping out gains in riskier assets post NFP.
According to Ryan Littlestone from Forexlive: "The numbers involved (around $4bn) are peanuts in the Chinese banking sector which posted H1 profits of over $76bn. Also Chinese authorities seem to be well on top of making sure banks have appropriate provisions to legislate for bad debts. Non performing loans amount to only 1% of total loans. Banks are asked to keep reserves of a minimum of 2.5% of total credit and there have been calls to raise that amount.·
Elaborating further on the Chinese default concerns, Littlestone added that "reducing or writing off non performing loans is a natural feature to nearly all global economies but is a fairly new process in China, but the US, UK and Europe have been creating toxic banks to palm off bad debt, and China is a long long way from that."
A complacent market gets burnt out
While some HFT-led moves may have kick-started the snow ball, as the headlines contained the magic words “China”, “banks” and “default”, coupled with complacency on carry trades - led to an immediate sell-off in the Shanghai stock exchange, immediately followed by a carnage of Yen shorts, Aussie, Kiwi longs - an over-positioned and complacent market seems to be the most accurate conclusion if one is to make sense of all the hysteria hitting the past Asian session.
Some argue whether or not it was a coincidence that currencies such as the AUD/USD were at a crossroad facing the 50% fibonacci retracement area from the 2013 bearish extension, although Littlestone throws cold water to that theory, noting "I think it’s coincidental that various currencies were at the top. I think that was a reason the sell off was so intense as there were probably plenty of positions bought up top and plenty of bids a reasonable distance below looking for an intraday dip."