Photographer: SeongJoon Cho/Bloomberg

Charting the Markets: China Rout Prompts Flight to Safety

China shares sink 6.4 percent, while the yen and U.S. Treasuries continue their January rally.

The two biggest themes of 2016 continue to play out across financial markets: China and oil. Chinese stocks plunged on Tuesday and crude fell below $30 a barrel. The two-day drop in West Texas Intermediate topped 8 percent after a 21 percent rally on Thursday and Friday, the biggest in over seven years. Data on Wednesday may show U.S. supplies rose by four million barrels last week, keeping inventories more than 120 million barrels above the 5-year seasonal average. The sliding price of oil hasn't deterred Saudi Arabia. It won't reduce its spending on energy projects. Asian stocks dropped as much as 1.6 percent after the biggest two-day gain in over four years.

China's Shanghai Composite Index plunged the most since the first week of January, falling to a 13-month low. The man whose Chinese stock-index futures wagers returned more than 6,200 percent last year says the equity benchmark might drop a further 15 percent in the first half. Huang Weimin, who manages the Yourong Fund, says slowing economic growth and a weaker yuan will fuel capital outflows. He's not alone. Some of the nation's most accurate forecasters say the index may not bottom until it falls to the 2,500 level. The Shanghai Composite closed Tuesday at 2749 having plummeted 22 percent in 2016. It's the world's worst-performing primary equity index this year.

Once again the yen is the beneficiary of risk aversion. It's the best performing currency against the dollar, today and this year, out of 31 tracked by Bloomberg. The yen's fortunes are becoming entwined with the performance of global stock markets. The 120-day correlation between the dollar-yen exchange rate and the MSCI World Index, which tracks developed markets, stands at 0.71, near a record high reached in December. The yen's strength is another reason the Bank of Japan might loosen policy on Friday. The yen has risen 2 percent against the dollar in 2016 after four years of declines.

The Federal Reserve starts its two-day policy meeting on Tuesday as the 10-year note yield drops to the lowest since October. Treasuries are heading for the biggest monthly gain in a year, rising 1.6 percent, according to Bloomberg World Bond Indexes. The thinking is that financial-market turmoil may deter the U.S. central bank from raising interest rates as many as four times in 2016. When the Fed tightened policy on Dec.16 the 10-year yield traded at 2.26 percent. Today it's fallen to 1.97 percent. Strategists surveyed by Bloomberg still expect yields to rise to 2.7 percent in the fourth quarter. The probability the Fed will increase its benchmark at least once more in 2016 has dropped to 71 percent from 93 percent at the start of the year, according to futures data.

Mark Barton is a presenter on Bloomberg TV. Follow him on Twitter @markbartontv

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