A brief impression of what's going on out there ? Just about everything......

Thursday 20th August 2015

A brief impression of what's going on out there ? Just about everything......

 

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It's come to something when an event as big as Germany and the Netherlands rubber-stamping Greece's third bail-out package (although not without domestic political difficulties) passes by pretty much unnoticed ..... in market terms, at least. The fact is that there is too much else to study, and none of it makes for comfortable reading. Think China, Emerging Markets, Oil and Rates, to name just a few.

China :

Given China's huge role as an engine for global growth since the economic crisis, worries about a slowdown in China are certainly valid, as are suspicions that the true growth rates in that country may be considerably lower than official data suggest. Was the currency depreciation a tacit admission that the authorities are more concerned about the state of the economy than they let on, or is it a managed move to a more market-driven exchange rate designed to help the IMF's acceptance of the yuan / renminbi as a reserve currency ? The markets hate uncertainty, and China has never been exactly transparent in its actions, or even more importantly perhaps in its intentions. After the initial 3-4% downward move, the People's Bank of China has intervened in foreign exchange markets to prevent further losses. Is it their intention to carry on doing so ? If so, even with the PBoC's massive resources, is it a sustainable course of action in the longer term ? Similarly, the reversal in Chinese stock markets has sent jitters round the world, only partially soothed by unprecedented and aggressive intervention in the markets by the authorities. After intraday falls in Shanghai of over 6% and 5% respectively in the last two days, the market rallied in late trading to finish higher on both days  --  evidence of concerted intervention, though none was seen today when the market closed down over 3%. Again, the question being asked is :  "Is this kind of intervention sustainable, or even desirable?".

 Emerging Markets :

There may still be some in the so-called developed economies who believe that  they are largely insulated from the great difficulties now faced by emerging nations. If so, they need a serious re-think. After the 2008 crisis, it was growth in emerging markets that in large part led the world back to global growth. Even now, it accounts for 52% of gross global GDP in purchasing power parity terms (ref : Financial Times Leader p.8). If the collapse in emerging markets continues, it could easily pull the world back into recession. The rout in commodity prices has severely damaged the economies of those nations that produce them, leading to huge capital outflows (nearly $1 trillion in 13 months) and plunging currencies. In nations that compete with China in manufacturing and exports, that nation's currency devaluation has prompted fears of currency wars and competing devaluations (they've already started) which of course in turn means more capital outflows. There is little sign just now of an end to this pernicious cycle.

Oil :

 West Texas Intermediate trading at just over $40 per barrel, and Brent Crude once more under $47 ? Another slump yesterday after a large and unexpected rise in US Crude Inventories (stocks). One might make a weak case that these particular numbers seem worse than they are (for oil bulls) due to refinery shutdowns leaving crude oil stocks in situ. Not many would be of a mind to listen to that argument, though. Overwhelmingly, the impression is one of massive over-supply. There is sporadic evidence of lower prices bringing about some pick-up in demand (which is welcome) but also concern that slowing growth rates in China for example might severely reduce that demand (which is not). Cheap oil is a two-edged sword of course, and in most ways good for consumers. But it does have disinflationary effects, which brings us to.......

 Rates :

 Released yesterday, the minutes of the US Federal Reserve's July meeting and July's US Consumer Price Inflation data .... and frankly, we're little closer to divining the timing of the rate hike. Policymakers said that conditions for a rise were "approaching". Well, we know that and it's a view largely based on improving conditions in the labour market. But apparently there also was considerable debate amongst the FOMC members about disinflationary pressures and the strength of the US$. The worries about those disinflationary pressures will not have been relieved by the CPI data, with both headline and core readings up just 0.1% for the month, below expectations. And the latest slump in oil prices will do nothing to encourage an early hike. The minutes were seen as mildly doveish (hence a slightly weaker dollar, lower bond yields etc) , but in truth the market is so skittish that any strong data, particularly regarding employment, could easily reverse that sentiment. So, all in all, Fed watchers are probably no better off.