China
The slowdown in China and the devaluing of its currency has led to chaos in financial markets with collapsing stock and commodity prices.
China’s overall output has entered contraction mode dragged down by a sharp slowdown in the manufacturing sector. The slowing Chinese economy comes with global economic headwinds not only reducing the demand for global commodities and Western goods, but additionally, offers the prospect of cheap Chinese goods flooding Western markets so hurting domestic producers there. Furthermore, there is some concern over the true state of the Chinese economy with some skepticism over official data released.
China is the dominant financial topic right now. China’s development has been remarkable. It has grown from an economy producing around GBP 500 Million of GDP in the mid 1990’s to a 10 Trillion plus economy in 2014. But this powerhouse is faltering. Some commentators argue that China is about to hit the growth brick wall like Japan in the 90’s.China needs to move to a more consumer orientated and service driven growth but this transition may be far from smooth.
Equities
European shares endured their worst August since the height of the sovereign debt crisis in 2011 as ramifications of China’s stock market crunch continued to spread to the rest of the world. The prospect of a US interest rate rise also impacted sentiment.
At one stage over the last fortnight major Western markets were down approximately 10% enduring a dramatic roller-coaster ride. The Shanghai Composite Index of shares has fallen about 40% from its peak in June despite considerable market intervention.
Fixed Income
In times of global financial stress investors move to ‘safe haven’ investments. This includes short maturity bonds and gold (gold has been around for 5,000 years as a trusted source of wealth!) Yields on 10 year US Treasury bonds fell below 2% at one stage. European Government Bonds were also sought by investors. (Always remember with bonds; as prices rise, yields fall; so falling yields are profitable for investors unlike falling stock prices!)
Interest Rates
China: The People’s Bank of China cut Interest Rates again last week to support the equity market.
UK: Mark Carney,Governor of the Bank Of England and Chairman of the Monetary Policy Committee, rejected fears that stock market chaos and the dramatic slowdown in China had changed the Bank Of England’s targets for interest rates and inflation. Rates have been at 0.5% since March 2009. Fears of a new global downturn has, however, dramatically shifted the market’s expectations of a UK rate rise. Six weeks ago the market expected the first rise next April; now the market is pricing in next September.
US: Similarly the debate continues as to whether the US will raise interest rates this month or has that decision been delayed.
Europe & Japan: Neither country was debating an interest rate rise before the chaos caused by China. Both regions are likely to revert to further stimulus measures as required.
Commodities
Oil: Up to 40 North Sea platforms are in danger of being shut down early because of the collapse in the price of crude oil and relatively high operating costs. Brent Oil fell to as low as USD 42 per barrel before recovering. At these price levels much oil production is unprofitable although US ‘fracking’ is a cheaper method of production than traditional oil drilling platforms found in the likes of the North Sea.
Foreign Exchange
With Emerging Markets countries the main producers of commodities, and the latter experiencing multi-year lows, the JP Morgan index of Emerging Market currencies has hit new lows.
Misc.
Greece: Europe is preparing for a Greek debt restructuring plan that it hopes will allow Athens to claw its way out of a deep depression. This is likely to include an extending of loan maturities and / or suspension of interest rate repayments rather than a ‘writing off’ of Greek debt which Europe nor the IMF does not seem to have appetite for.
Equities
S&P 500: 1990
Nasdaq: 4630
Bonds – 10 Year Government Yields
US 2.12%
EU 0.70%
GB 1.94%
Foreign Exchange
USD/EUR 1.1200 (1 euro buys 1.1200 dollars)
GBP/USD 1.5400 (1 pound buys 1.5400 dollars)
Commodities
OIL: Brent: 48.50 (dollars per barrel)
GOLD: 1125 (dollars per ounce)
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Regards
Paul McCormick
