(Bloomberg) -- Yuan traders will be glad to see the end of a volatile quarter that’s set to be its worst in a year.
The currency is down 3.6% in the past three months, a period where it weakened past the key 7-per-dollar level for the first time since the financial crisis. That’s the second-worst performance in Asia, with almost all the declines occurring in August. Stocks and bonds had a more muted quarter, with the Shanghai Composite Index dropping 1.7% and the yield on 10-year government debt dropped moderately.
Trading was relatively quiet on Monday before the extended holiday even as the Trump administration was said to consider restricting U.S. investors’ exposure to China. Risks next month include a fresh round of trade talks, while China’s central bank could disappoint traders counting on additional policies to support economic growth. Beijing was seen as ensuring stability before China celebrates the 70th anniversary of the People’s Republic on Oct. 1.
“I have never flipped my yuan view so many times in such a short period of time -- every day seems to be different,” said Stephen Innes, a market strategist for Asia Pacific at AxiTrader Ltd. “The lack of Chinese easing continues to weigh on regional growth and equity sentiment, which is hardly providing an inspiring backdrop to own yuan.”
Yields on China’s 10-year notes have dropped eight basis points this quarter, versus 32 basis points for comparable U.S. Treasuries as the People’s Bank of China refrained from using intense monetary easing like a policy-rate cut to bolster the slowing economy. This year’s range for the benchmark rates -- at about 45 basis points -- is set to be the narrowest in seven years.
Analysts and traders surveyed by Bloomberg predict 10-year yields will end 2019 at 3% versus Monday’s 3.15%. FTSE Russell last week said it will hold off on including the country’s debt in its flagship World Government Bond Index.
Diverging Stocks
The Shanghai Composite Index slipped this quarter as traders waded through a spate of profit warnings and more tariff threats from the U.S. The small-cap ChiNext bounced 8.1% as of midday Monday to erase much of the second quarter’s 11% pullback, helped by a return of risk appetite.
It’s a different story for Hong Kong’s Hang Seng Index, which is poised to hand investors some of the world’s worst returns this quarter. Reeling from a tumbling yuan and the trade war, months of often-violent street protests have added pressure on earnings for some of Hong Kong’s biggest companies. The index is down 8.6% for the quarter.
There are hopes the fourth quarter will be brighter for both stock markets. Analysts and fund managers predict the HSI will rise to 28,000 points at year-end, 7.9% above Friday’s close. In that time the Shanghai Composite is seen gaining 5.7%.
China’s onshore markets -- as well as its stock-trading links with Hong Kong -- will be shut for five trading days from Oct. 1. China’s biannual extended holidays have recently proven to be a vulnerability for mainland traders, who have had to wait to react to market-moving news. That’s a risk some will chose to not take this time, with many seen clearing out positions on Monday.