A sell-off but not the end of…
Whatever you want to call it – The Great Fall of China, Black Monday 2.0 – yesterday was a strange day for world markets.
China sneezed a couple of weeks ago by devaluing the yuan and the effects of that were finally being felt in a day of massive panic across all asset classes. The hope over the weekend had been that the People’s Bank of China would step up to the plate and loosen monetary policy by either allowing banks to lend more money or through an outright cut in interest rates – they did not and the lack of support alongside fears of pronounced and prolonged slowdown has seen investors hit the ‘sell’ button faster than you can say ‘Lehman Brothers’.
Currencies calm down after day of mania
The movements in the currency markets have been awe-inspiring, laughable and downright silly in some cases but the USD has been taken apart as the market pushed its expectations of a rate hike from the Federal Reserve to March 2016. A week ago it was a 50/50 call that we would see a hike on September 17th. Euro has been driven higher on this, pushing to the highest level since January, while similar moves have been seen in the yen.
As for emerging markets and commodity currencies, the picture here reminds me of a scene in a film where a lone man with a barrow trundles down a road, rings a bell, and implores the people of the village to ‘bring out your dead’. Anything tied to commodities or emerging markets has been slapped to fresh multi-year or record lows as market participants shift to the havens of the euro, Japanese yen and Swiss franc.
Forward thoughts
I personally think that yesterday’s markets are a storm in tea cup, although tremors will likely be felt for a number of weeks. Yesterday’s fun and games do raise some very interesting questions about the state of the global economy, the mind-set of investors and, furthermore, what monetary policy looks like in a post-crisis world.
The main thing that the moves of the past few weeks have shown is just how fragile sentiment is in the global economy at the moment. The decision of the People’s Bank of China to revalue the yuan was a perfectly reasonable policy decision for a central bank plagued by a peg to an overvalued currency but global growth is seen as not strong enough to deal with the deflationary wave from the falling yuan.
We delay our Fed and BOE rate hike thoughts
Given yesterday’s moves I have moved my expectation of a Fed rate hike from September to December 2015 and a similar rise from the Bank of England from February 2016 to June 2016. I still don’t think that the Fed should wait but likely will now.
Overnight we have seen some stability come into markets with European stocks called higher. Asian equities outside of China have also repaired some of their losses but stocks in Shanghai are selling off heavily into the close. As someone said to me yesterday this isn’t over yet though; when ships sink it takes a while for the bodies to float to the surface.