Markets calm as stimulus calms nerves
It’s been a relatively subdued day during Asia as the China crisis seems to have receded for now. The yuan was set at a fresh four-year low today at the ‘fixing’, while Chinese stocks opened in the positive and haven’t looked back. The bank of China did inject further liquidity via short term repo operations, and between the combination of measures we seem to have found the bottom for now.
Equity markets across the Far East were up and the calmer equity markets brought calm to FX too. Having fallen heavily yesterday, the euro, sterling and Swiss franc all gained against against the US dollar in overnight trade. The Japanese yen weakened against the dollar as the risk trade diminished, though this turned around following the speech of central bank governor Kuroda in the US.
Further stimulus required?
The impact of the move in China is showing great breadth already, as yesterday, the ECB’s chief economist Peter Praet and bank of Japan governor Kuroda both started talking about potential for further stimulus in order to hit their inflation targets. This is a direct response to the global weakness in equity markets and commodities and reflects the impact that further slowing of growth in China is perceived to have in global markets. The Reserve Bank of New Zealand was also making similar noises around the potential for further easing if required.
US hikes delayed by turmoil?
Jackson Hole provides a further opportunity to look at the chances of a hike by the Federal Reserve as we have vice chairman Fischer speaking. Given the market dislocation, the market expectations for a dovish bias, we may actually see the dollar strengthen if Fischer continues to toe the data dependent party line.
Fed member Dudley has already commented on the fact that international developments have increased risks to growth suggesting that a September hike is less compelling, despite much stronger than expected durable good orders. This afternoon we have the second estimate of second quarter growth which is also likely to be stronger than the 0.6% first reading.