The closure of Chinese markets today has removed an agitator and contributed to the calmer tone in the global capital markets. Sweden’s Riskbank decision to policy on hold has sent the krona up nearly 1% against the US dollar. It is the big mover.
The semblance of stability that had seemed to return to the global capital markets has ended abruptly. Nearly every major country that has reported August manufacturing PMI except Germany has disappointed. China’s manufacturing PMI hit a three year low (49.7 vs 50.0 in July). Global equities have slid, and the anticipation is for a sharply lower opening in the US. US 10-year Treasury yields have eased about 5 bp. Core, European bond yields are softer, while periphery yields are firmer.
After a tumultuous week, the global capital markets are struggling to stabilize. Chinese equities were under sharp downward pressure following news reports that the large-scale intervention was to end. However, stocks roared back in late dealings, and other reports indicated that brokerages were being asked to boost their contribution to the equity market rescue fund by another CNY100 bln (~$15.7 bln).
There are three things that will command investors’ attention in the week ahead. The first, and most important, is whether the global capital markets will continue to move toward stability after the huge drama over the past week or two. The instability appears to have shaken the confidence of some Fed officials and market participants that a September lift-off is the most likely scenario.
While Asian equity markets extended yesterday’s rally, a consolidative tone has emerged elsewhere. This translates into heavier equities in Europe, including US shares that trade there, lower core bond yields, softer oil, and a dollar that has seen some of yesterday’s gains pared.
The global capital markets are staging a convincing recovery. The strong sustained gains in US equities yesterday has fueled continued recovery in Asia and Europe. The strong rally of the Shanghai Composite in the last hour of domestic trading looked to be officially goosed, and some are linking to the redoubling of efforts to get the market to stabilize before the September 3 military celebration in which much political investment is being made.
As the Fed is paving way for the first rate hike in a decade, the world economy prepares for the greatest shift of capital flows in half a decade. Recent market turmoil in the U.S. and China heralds the transition.
According to the conventional wisdom, the U.S. economy is recovering significantly faster than other advanced economies and the dollar is strengthening. In contrast, China’s economy is facing a slowdown with growth decelerating and the yuan depreciating.
Growing consumer confidence in the United States was not enough to offset fears that the stock market is overvalued. Consumer confidence rose to 101.5, a tremendous rise from the prior reading of 90.9, according to The Conference Board.
The inability of the US stock market to sustain gains following the Chinese rate cut has left the market unsettled. Similarly, despite early gains, Chinese stocks finished lower, with the losing streak extended into a fifth session.
Many Asian markets did gain, including a 3.2% rise in the Nikkei, and the MSCI Asia-Pacific Index gained about 1.5%. However, European bourses are off by about 1.3%, though mostly within yesterday’s ranges.
North American markets did not close well yesterday, and the Nikkei and Shanghai Composite sold off.
