Skyscrapers in the financial district of Pudong in Shanghai. Photo: Reuters, Aly Song

Citibank analysts wrote this week on how markets correctly looked past China risks, in part thanks to an increased liquidity injection by Chinese authorities, but also due to strengthening oil prices ahead of the OPEC meeting:

“The market faded China risks – for now correctly. Over the last weeks, the market has been able to fade both China risk, as well as US political risks. The fading of the former was driven by an increased liquidity injection by Chinese authorities, suggesting a cautious approach to the desired deleveraging.

“Furthermore, we would also note that shocks from China are less likely whenever the USD is weakening, given that CNY is an important transmission mechanism for any China shock to the rest of the world.

“We would say, though, that another reason for the market to be able to look through the China scare was the strong up-move in oil going into the OPEC meeting. Post OPEC, oil may well consolidate for some time. Even as Citi sees oil ending the year higher, any shorter term pullbacks in oil would expose risk assets to a higher degree to policy mistakes by the Chinese authorities.”