Circuit Breaker.

7th January 2016

Ian Copelin, Investment Director, my wealth comments “Global equity markets have fallen again today after China continued to weaken its currency, the renminbi.

This has heightened concerns about a slowdown in the world’s second-largest economy, as traders have taken the Chinese authorities acceptance of a renminbi depreciation as a way to help boost exports and stimulate growth.

The weaker renminbi sparked a sell-off in Chinese equities overnight that forced its market to shut early due to a trading curb or circuit breaker.  The Chinese authorities introduced the circuit breaker on 1 January 2016 to reduce volatility.  The mechanism triggers a 15 minute trading suspension if Chinese equities rise or fall by more than 5% and if on re-starting the change in equities touches 7%, then trading closes for the day.

Today, the Chinese market fell 5% within less than 15 minutes of the market opening, triggering a 15 minute suspension.  On re-opening, the market immediately fell, triggering the market closure!

Consequently, in total today, Chinese shares only traded around 15 minutes!

This to me suggests that the new circuit breakers are actually making things worse, not better as it may have exacerbated sales as investors sold quickly in order not to get stuck in, ahead of a potential early close of the market.

In fact, had they been in place last year they would have been triggered 20 times. In comparison, it would take a 20% market fall to trigger an early halt to a day’s trading in America.

The Chinese equity market is still relatively immature and is therefore very volatile as local investors appear to be in an environment where you sell first and ask questions later.  Consequently, it needs to find its own level – which today, may or may not have resulted in a bounce in China and potentially calmer global markets this morning.

Whilst on a painful day like today it is easy to be fearful rather than brave, in my opinion it is not a day to be risk averse and timid – painful days like today could represent long-term buying opportunities.”