Economic Conditions

Rounding Up a Wild Market Week

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.

Making Up Lost Ground

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. 

The Complicated Reality of the U.S. and China Economies

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.

Finally a U.S. Economic Report, and Dudley Speaks

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. 

Would a Market Leader Please Step Forward?

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. 

More than the Yuan is to Blame for the Global Sell-Off

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.

Breaking Down World Growth

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.

Reading the Same Market News Differently

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.

Be Wary of Eyeballing a Correlation

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.