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Australia's $5.6 Trillion Housing Frenzy Winds Down

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All eyes on Chinese stocks, worries ramp up for China’s bond market, and some people question if Australia’s housing boom is over. Here are some of the things people in markets are talking about.

Chinese Stocks Tumble

Chinese equities will be closely watched Friday after Thursday’s sell-off, when a gauge of large-cap shares plummeted 3 percent, the most since June last year. Front and center were concerns about a bond rout that may be getting out of control and investors asking what happened to state support that often steps in during times of turmoil. A particular surprise was how the losses quickened into the market close, with the CSI 300 Index losing 52 points in the final 45 minutes of trading. That was the steepest afternoon decline since the depths of China’s stock market crash in January 2016. Hong Kong equities did not escape the souring sentiment, with the Hang Seng Index sliding 1 percent from a decade-high.

Crucial Year For China’s Bond Market

China’s deleveraging campaign is starting to bite in the nation’s corporate-bond market. Yields on five-year top-rated local corporate notes have risen about 33 basis points since the start of November, hitting a three-year high of 5.3 percent. With more than $1 trillion of local bonds maturing in 2018-19, it’s going to become increasingly expensive for these firms to roll over financing -- and all the tougher for those in industries like coal that the nation’s leadership wants to shrink. 

Australia’s Housing Boom  

After five years of surging prices, the market value of Australia’s homes has ballooned to A$7.3 trillion ($5.6 trillion) -- or more than four times gross domestic product. Not even the U.S. and U.K. markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them. But prices in major cities like Sydney are finally leveling off and a wave of new apartments are about to hit markets in Brisbane and Melbourne. As the party finally winds down for the housing market, the question now turns to how severe the hangover will be. That will determine the economy’s fate for years to come.

Futures

Japanese equity traders are back at their desks after the market was closed Thursday for the Labor Thanksgiving holiday. They’ve yet to trade on the Federal Reserve induced dollar weakness that spurred gains in the yen, so that should weigh on the Tokyo open. Futures indicate small declines as trading begins. U.S. equity markets were closed for the Thanksgiving holiday, but trading will open back up on Friday until closing at 1 p.m. in New York. The euro climbed after positive economic data in the region.  

This Week’s Winners and Losers

Chinese and Hong Kong government notes are among the biggest losers, in a week that's been very rewarding for many assets across the region. Australia's 10-year yield premium dropped to within 3 basis points of the 16-year low reached in June and the two-year gap was 0.3 basis points away from disappearing all together for the first time since 2000. South Africa faces a nervous end to the week with S&P Global Ratings and Moody’s Investors Service scheduled to publish ratings. The country already lost investment grade scores on foreign debt from S&P and Fitch and now it's at risk of seeing rand-denominated bonds cut to junk, which could trigger massive capital outflows.

What we’ve been reading

This is what caught our eye over the last 24 hours.

— With assistance by Garfield Clinton Reynolds

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