Globally equities have fallen amidst fears that European quantitative easing will not be enough to counteract rising interest rates for U.S. Treasuries and falling money supply growth in China.
In early morning trading, the U.S. S&P 500 fell sharply below 2,000 amidst fears that the Federal Reserve may raise interest rates sooner than expected. The Federal Reserve Bank of San Francisco yesterday released a report that said policy makers could increase benchmark interest rates sooner than expected, as quickening inflation rate and a declining unemployment rate encouraged a more hawkish monetary regime.
“An important concern is that the public might not give enough weight to how dependent the central bank’s guidance is on both current and incoming data. Thus, the public could underestimate the conditionality and uncertainty of interest rate projections,” the Federal Reserve report said.
The writers also noted that policy makers themselves were uncertain of future policy decisions: “The public also may be less uncertain about these forecasts than policymakers.”
China Money Constrained
China money supply growth unexpectedly slowed, falling to a five-month low. The Chinese government’s broadest measure of money supply, known as M2, rose 12.8% in August year over year, lower than the 13.5% growth rate in July and below most analysts’ expectations.
Analysts have expected easing monetary conditions to help China growth rates from falling at an accelerating rate, but China’s Premier Li Keqiang surprised experts by a surprisingly hawkish comment at a speech for the World Economic Forum. “There’s already a lot of money in the pool, and we can’t rely on monetary stimulus to spur economic growth,” said Li, adding that China’s monetary policy will remain “prudent”.
The decline in money supply growth indicates continued weakening demand in the Chinese economy as it attempts to shift from an export-driven to domestic demand focused economy. Analysts expect total financing by the Chinese central bank to have rebounded in August, although still below levels seen in August for the past three years.
The decline in financing and the tightening money supply suggest that China may reaching its limit of stimulating domestic demand for goods and services by loosening credit. While China is still seeing high inflation and overall domestic growth, some analysts believe that a slowdown in China could have a strong impact on European and American markets. The EU is China’s biggest trading partner.
After reaching the psychologically significant 2,000 mark in trading, the S&P 500 has remained at that level in recent weeks, but traders’ expectation of volatility has risen in recent days as global deflationary pressures and a slowdown in China may stunt growth for companies in the coming weeks and cause equities’ bull run to reverse.
The Chicago Board Options Exchange Volatility Index, or VIX, rose 2.7% in early morning trading on Tuesday, rising over 13. The VIX, which measures volatility in the S&P 500, has been at historic lows throughout 2014 after remaining very low in 2013, signaling little fear amongst investors of a large crash in U.S. stock prices.
Some analysts have said that the tapering of the Federal Reserve’s bond purchasing program known as Quantitative Easing could cause equities to fall quickly. In previous years, the S&P 500 fell either shortly before or shortly after previous rounds of QE stimulus ended.