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August 24, 2015
"I'm not pushing, but I'm asking"
The week in review...
Exchange rates: Race to the bottom? After the August 10 start of China's managed floating-rate currency regime – resulting in a 4.4% downward move vs. the US dollar¹ – perceived competitive pressures have increased on other emerging market (EM) currencies and economies. Following China's lead, Kazakhstan's central bank switched to a floating exchange rate, resulting in a 22% drop vs. the US dollar. Other EM currencies, including the Malaysian ringgit, have broken away from preferred government exchange rates.
More telling, however, have been capital flows: one estimate showed total net capital outflows from the 19 largest EM economies reaching over $940 bn in the 13 months to the end of July, almost double the net $480 bn outflow during 3 quarters of the 2008-9 financial crisis.
The pressures on EM currencies and economies pre-date China's move; the global commodities rout began in June 2008 according to some measures,² resulting in a roughly 60% fall so far.
The Fed: Tick, tick, tick The minutes of the July 28-29 FOMC meeting left readers with little guidance about the likelihood of a long-awaited – or dreaded – September hike in the Fed funds target rate. The minutes suggested that employment, growth and inflation were all improving, perhaps setting the stage for the move.
But the three weeks since the meeting haven't been kind to the Fed's assumptions. China moved its exchange rate vs. the US dollar down about 4% in 3 days, setting off widespread worry about declining growth rates in Asia and emerging markets overall. The continued rout in commodity prices offered little reassurance. US consumer inflation rose just 0.2% over the 12 months ending in July – well below the 2% annual rate the Fed considers healthy. WTI crude oil dropped over 18% to just over $40.20 on Aug 20, a level not seen since the depths of the 2008-9 recession.
All this news has caused some observers to question July's widespread belief that the FOMC will make its move at the September 16-17 meeting. World markets have reacted negatively to the resultant uncertainty; US equity markets have been reacting unusually strongly to such news as the unpegging – and subsequent 22% drop – in Kazakhstan's currency, the tenge.
Greece bailout: From Luxembourg to Frankfurt, via Athens The first major payout from the current bailout program was disbursed, in cash, by the European Stability Mechanism (ESM) on Thursday Aug 20 – €13 bn ($14.7 bn), of which about €12 bn will be used to pay down debt, including an earlier bridge loan and money owed to the European Central Bank (ECB). Part of the money owed to the ECB is a €3.2 bn payment, also due on Thursday. The total bailout package could come to €86 bn, including up to €25 bn to recapitalize Greek banks – with €10 bn of the bank recapitalization funds, separate from Thursday's cash payment, available immediately.
¹ As of Aug 21, 2015
² Source: Bloomberg, as of Aug 21 2015
Signs of the times:
Tsipras resigns, paving way for snap Greek election – Reuters
China injects liquidity into market via MLF – Xinhua
Chinese Factory Gauge Drops to Lowest Level Since March 2009 – Bloomberg
Japan's Economy Contracts as Consumption, Investment Decline – Bloomberg
(US) Home sales near eight-and-a-half-year high, brighten economic outlook – Reuters
Sources: Bloomberg, Wall Street Journal, Financial Times, New York Times, Xinhua, China Daily, Market News International, ekathemerini.com, Deutsche Welle.
...And the week ahead:
GLOBAL ECONOMIC CALENDAR: August 23 – 29, 2015
Europe, UK, Africa, Mideast
Japan, Asia Ex Japan & Pac Rim
Belgium: Grand Prix (auto racing)
Taiwan: industrial production
20-city home prices, purchases of new homes, consumer confidence
Germany: GDP, business confidence
China: private-sector leading economic index
Hong Kong: exports, imports, trade balance
Durable goods orders, oil inventories
UK: retail sales
2Q GDP (second estimate), pending sales of existing homes, jobless claims
UK: nationwide house prices
Russia: gold and foreign exchange reserves
Germany, Spain: inflation
UK: GDP, consumer confidence
China: industrial production
Japan: consumer prices
The People's Bank of China (PBC or PBoC) is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China.
The medium-term lending facility (MLF) is a liquidity tool of the People's Bank of China (PBoC), designed for commercial and policy banks to borrow from the central bank by using securities as collateral.
West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.
The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve system (the Fed) responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The federal funds rate (fed funds, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.
Gross Domestic Product (GDP) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.
The European Stability Mechanism (ESM) is a permanent rescue funding program to succeed the temporary European Financial Stability Facility, a special purpose vehicle financed by members of the eurozone to address the European sovereign debt crisis.
The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.
Global investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Equity securities are subject to price fluctuation and possible loss of principal.
Currencies and commodities contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
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