Monday Morning Cheat Sheet: 3 Stories Moving Markets

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Major markets declined in Asia on Monday, fueled largely  concerns over tight monetary policy in China. Japan’s Nikkei slid 1.26 percent, led by a 1.9 percent decline in the Nikkei China 50 index. In Hong Kong, the Hang Seng fell 2.22 percent, while the S&P/ASX 200 declined 1.47 percent in Australia.

European markets are down as well this morning, with the DAX slipping near 1.4 percent, the FTSE 100 down just over 2 percent, and the STOXX 50 down 1.5 percent.

U.S. market futures are not promising this morning, with all three major indices down around 1 percent in pre-market trading.

Here are three stories to keep an eye on:

1) Tight Credit in China: Chinese stocks tumbled on Monday, catalyzing market losses and negative investor sentiment across the region. The Shanghai Composite fell 5.3 percent, led by declines of up to 7 percent in the financial sector. The trigger for the selloff is news from the People’s Bank of China that lending rates — historically high — were “reasonable.” Many investors and businesses disagree. Recently, lending rates have been as high as 12 percent, which has created what some see as a government-induced credit crunch.

The PBOC has engaged in monetary stimulus in the post-crisis era, but while the government is concerned that there is too much cash in the market, many businesses are concerned there is too little. Just last week, amid concerns that the money market was freezing up, the PBOC added 50 billion yuan ($8.2 billion) to the system through short-term liquidity actions.

The move was credited with generally stabilizing markets on Friday. The cash injection helped lower the one-day repurchase rate 384 basis points — or 3.84 full percentage points — to 7.90 percent. The seven-day rate fell 351 basis points to 8.11 percent. Both rates touched record highs on Thursday of 13.91 percent and 12.45 percent, respectively.

2) German Business Climate Improves Slightly: The Ifo Business Climate Index increased slightly in June. The index for overall economic sentiment increased from 105.7 to 105.9, a fraction below expectations. The current conditions index decreased from 110.0 to 109.4, also missing expectations by a fraction. The business expectations index increased from 101.6 to 102.5, beating expectations for a more marginal increase.

Among the industries, manufacturing had the largest increase (+1.7 points) while services declined 3.4 points.

IFO Business Climate

3) North Korea: From Hyperinflation to Dollarization?  North Korea’s economy has continually been defined by its inability to feed its own people, and the sanctions from the international community which are making the inefficient communist economy ever more strangled.

There was hope when Kim Jong-un assumed office that the young leader would pursue reforms that would both liberalize the political class and the economy. However, hunger still plagues the country, and while North Korea makes bombastic threats about war with the U.S., Kim Jong-un has not tackled the economy in any substantial way. North Korea has had problems with its currency over time, as the Won has fallen dramatically in value, and the country as botched attempts to stabilize it. While the Won is pegged the the U.S. dollar, regulations make it untradable, and black markets are thriving for those in need of food. However, widespread use of the Chinese yuan and U.S. dollar throughout North Korea has peaked the interest of many, as the yuan makes up 80 percent of transactions in the region of North Korea bordering China. With the dollar making up half of the transactions further north, there is hope that this “spontaneous dollarization” will help liberalize North Korean, whether it wants to or not… (Read more.)

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