HK dollar under pressure amid China woes, capital flight, oil drop

The Footsie was on the brink of falling into 'bear market' territory come noon, weighed down by a constellation of worries, spanning from capital outflows from China and Hong Kong, another slide in crude oil quotes to speculation in some corners that Hong Kong was under pressure to free itself from its peg to the US dollar.

As of 12:05GMT the Footsie was down by 175.4 points or 2.98% to 5,701.40, approximately 19.5% below the highs hit on 27 April 2015.

Net capital outflows to emerging markets went into reverse in 2015 - for the first time since 1998 - because of China, the Financial Times reported on Wednesday, citing a report from the Institute for International Finance.

In parallel, the HK dollar slipped as low as HK$7.8229, just 0.35% above the lower limit of trading band permitted against the US dollar, while forward contracts were changing hands at their weakest level of this century.

Monies were drained from emerging markets to the tune of $735bn, easily outpacing the $540bn projected by the IIF in October.

All but $59bn of that amount exited China.

Significantly, the discrepancy between the actual outcome and the IIF’s forecast was largely the result of the opacity of the financial channels used to run the blockade of Beijing’s capital controls, the FT said.

Worryingly, many of those flows appear to have fallen into the category of ‘errors and omissions’.

Overnight on Wednesday, the Hang Seng China Enterprises Index registered an intra-day drop of 5.5% before paring those losses to 4.3% by the close of trading.

That came as Cnooc, China's biggest offshore oil company, said it would cut output this year, and stock in Petrochina dropped to a near 11-year low.

The H-shares gauge retrated to 8,015.44, its worst close since March 2009.

To take note of, Reuters reported that three-month borrowing costs in Hong Kong Dollars spiked from 44 basis points at the start of the week to 55 basis points - a possible strain.

However, the overnight repurchase rate in mainland China was only six basis point higher to 2.06%, revealing few signs of stress in the country's financial system.

The People's Bank of China was expected to add more liqudity to the financial system before the start of the Lunar New Year holidays.

Acingt as as a backdrop, front month Brent crude futures surrendered 2.42% to $28.08 per barrel and West Texas Intermediate another 2.78% to $28.77 on the ICE.

In turn that dragged on Russia's ruble, which as of 11:13GMT was 1.90% stronger against the ruble to 80.23.

The DJ Stoxx 600 Oil&Gas sector index was lower by 3.5% to 228.31.

Euro/dollar was little changed, off by just 0.02% to 1.0909, possibly as traders waited in the wings ahead of the European Central bank's policy meeting the next day.