China stocks tumble Aussie capex crumble oil supported

Chinese stocks tumble as PBOC withdraws liquidity

Shanghai Composite index closed down 6.5%, positing its biggest daily fall since January 19. The index closed at 4,620, up 42.8% year-to-date. The stock selloff emerged after the People’s Bank of China PBOC drained tens of billions in yuan liquidity to address a flood of funds in the financial. The PBOC’s drainage operations were carried out by selling more than 100 billion yuan in repurchase agreements.

China’s overnight repurchase rate, a monitor of interbank funding, closed at a five-year low of 1.03%, as a result of the PBOC’s campaign of pumping massive amounts of liquidity to address an all-round macroeconomic slowdown. Other measures of liquidity are seen in the six-year lows of Shanghai Interbank Offered Rate (SHIBOR), whose five-day rate average hot 1.04%, the lowest since late 2009. The widening sea of liquidity is creating a liquidity trap as banks are awash with unallocated funds and individuals “try their luck” in the stock market.

Oil supported by 4^th weekly inventory decline 

Crude oil stabilized above $57.00 to recover from below $56.5 as inventory data from the US Energy Information Administration showed a draw of 2.80 mn barrels, outpacing expectations of a draw of 1.20 mn barrels. Traders had expected to smaller decline, or even a build, after the American Petroleum Institute’s inventories figures showed a rise of 1.3 mn barrels last week, following three weeks of withdrawals.

The prolonged decline in EIA inventories avoids oil bears’ interpretation that US shale oil production had begun to recover after the Q1 contraction.

Earlier in the day, oil was hit by reports that Saudi’s Aramco may raise its oil and gas drilling rigs to as high by 20% next year if oil prices remain on the rise. Brent oil is now around $62 a barrel, up from a low of $45 in January though still far from the $100 mark which Saudi officials said they favoured early last year. Saudi Arabia raised its crude production in April to a record high of 10.308 million barrels per day.

Australia’s plunging capex

Aussie added to losses after poor capex figures raised speculation of clear shift towards easing bias in next month’s RBA meeting. Last night’s Australia’s Q1 capex figures showed a 4.4% decline due to continued erosion in mining, manufacturing and services capex – the first drop since Q4 2013 that capex fell in all the three industries. The figures were especially more alarming as they showed a bigger than expected decline in capex intentions for 2015-16 in both mining and non-mining capex.

Recall this month’s RBA Statement of Monetary Policy noted that mining investment was expected to fall 10% in both 2014-15 and 2015-16. Private banks’ forecasts for 2015-16 range from -20% to -35%, clearly exceeding the RBA’s projections.

If the PBOC continues to refrain from injecting liquidity and the RBA opens the door for a June rate cut, then the Aussie could enter a new sell zone, facilitating the task for the central bank.