The global meltdown in stocks and commodities has continued. China failed to stem the tide by cutting reserve requirements (or interest rates) as many had expected. US 10-year yield had fallen below the 2.0% threshold but is back above it before the start of the North American session. European equity markets mostly gapped lower. The gaps have been entered as the selling pressure abates, but they have not been filled.
China’s Premier Zhou Enlai was asked in 1972 about the political consequence of the French Revolution, and he famously quipped it was too early to say. Even if, as historians recognize, Zhou was referring to the unrest in 1968 rather than the 1789-1799 revolution, it offers insight that is too valuable to let the facts distort.
Indeed, that insight offers good counsel now. While there is no substitute for prudent and disciplined risk management, we should avoid jumping to hasty conclusions drawn from the volatile price action.
The Economist posted this Great Graphic in June but it is arguably even more relevant today. It shows world growth broken down into four contributors, China, the US, India and ROW (rest of the world). Europe fits into this catch-all category.
It is measuring world growth based on 48 countries that account for 86% of the world’s GDP. It also weighted the GDP at purchasing power parity, rather than nominal currency levels.
The US dollar is trading higher against the dollar-bloc, encouraged by the continued decline in commodity prices and energy. Disappointment with retail sales when petrol is included pushed sterling lower. The greenback is making new highs against several emerging market currencies, including South African rand, Turkish lira and Mexican peso and Malaysian ringgit.
Oil prices have fallen to new lows following news of an unexpected 2.68 mln barrel build of US crude oil inventories. The API data had prepared the market a small draw down.
Many view the sharp drop in oil prices through the lens of inflation/deflation. For example, this is the traditional view of the ECB. It hiked rates in mid-2008, between Bear and Lehman’s demise ostensibly because the near-$150 per barrel of oil was going to be inflationary.
The US dollar has been mostly confined to yesterday’s ranges against the major currencies. Outside of a larger than expected Japan trade deficit, and a jump in the Eurozone’s current account surplus, the data stream is light. The main interest is the US CPI report and the FOMC minutes later in the session.
Manufacturing is falling in parts of America and the trend may spread to the entire country, while in Asia Japan sees a fall in GDP and faster inflation.
In America, the Empire State Manufacturing Survey saw the index fall to -14.9, falling by over 50% from the prior reading. This was the lowest the index has been since 2009 at the height of the Global Financial Crisis.
Firmer UK inflation has helped sterling recover from yesterday’s decline. Sterling overcame resistance near $1.5700 making $1.58 the next technical target. Poor US housing starts data, after a heady 9.8% increase in June, with permits unwinding 7.4% rise could provide better fundamental cover to push sterling higher.
Fears of a quick sharp devaluation of the Chinese yuan, disrupting the global economy, sparking a currency war, have eased. For the second session, the yuan stabilized. The central reference rate (fix) was CNY6.3969, having finished the Shanghai session before the weekend at CNY6.3912. The fix then was CNY6.3975.
A fragile stability has returned to the Chinese currency and stocks. With the help of the Social Democrats, the German parliament is likely to endorse Greece’s third aid package, even if a rump of Merkel’s CDU/CSU balk. The next adjustment of expectations for Fed policy, and the possibility of a rate hike next month, requires the next cycle of data, especially this month’s employment data.
