Daily Insight China triggers market rout
Group Economics Macro & Financial Markets Research Nick Kounis & Georgette Boele +31 20 343 5618
25 August 2015 • • •
Potent cocktail of China, EM and commodity fears leads to market rout The Chinese authorities are likely to ease policy soon - other central banks will wait and see for now Market turmoil can undermine confidence, but macro positives are still out there
Global equity markets…a sea of red
The heat of the moment
The potent cocktail of China, emerging market and commodity
It is always dangerous to draw strong conclusions during the
fears escalated sharply on Monday. The late losses on equity
heat of such aggressive market corrections, where the outlook
markets in the US on Friday and the lack of action by the
can look so bleak. However, we will try and take a step back
Chinese authorities over the weekend did not bode well for the
and make a number of observations below.
market opening. Chinese and Asian stock markets plunged on Monday and the European, and subsequently the US markets,
China will ease sooner rather than later
followed. The VIX surged and credit spreads widened.
We do not think that the Chinese authorities are waving the white flag in terms of supporting economic growth. Their aim in
Flight to safety
our view remains to foster a gradual slowdown and signs that
The deterioration resulted in a general flight to safe haven
momentum is deteriorating more sharply has always triggered
assets. The Japanese yen was the clear outperformer in
action to support the economy. They also have a lot of
currency markets. Furthermore, US Treasury yields fell, with
ammunition they can fire. We expect the authorities to take
the 10-y dropping below the 2%-mark, though Bunds did not
further steps sooner rather than later. Some combination of
benefit, with yields flattish.
reductions in bank reserve requirements, policy rate cuts, fiscal stimulus and further moderate yuan depreciation will be rolled
EM and commo weakness Emerging
market
and
out in the coming time. commodity
currencies
showed
substantial losses mirroring the price sell-off in commodity
Other central banks will wait and see
prices. What surprised some commentators is that gold prices
The heightened market turmoil – which if sustained could hurt
did not rally sharply. This confirms our view that its safe haven
global business and consumer confidence - and growth risks in
status is undermined by speculative long positions in the
China and emerging markets also increase the chances of
metal.
more accommodative stances by the big central banks. The Fed could delay rate hikes and the ECB could step up QE, for
Dollar weakness now, gains only in real panic
instance. But this is not our base case and we think it is too
Meanwhile, the euro saw a stunning rally against the dollar.
early to go in this direction. Central bankers will take a wait and
This reflects the closing of euro short positions used to fund
see stance to get a better picture of the situation before
carry trades. In addition, the dollar was hurt because of the
deciding.
pricing out of Fed rate hikes this year. However, if there were to be a further escalation of market turmoil towards a real
Macro positives – yes positives – are still out there
panic, there would be a strong dollar rebound as investors
The US economy has been gaining momentum recently, while
swarm to the most liquid assets.
eurozone growth has been resilient after firming earlier in the year. Even in China, the data have not been all bad, with signs
Questions on policy reaction and growth
of improvement in June before July’s deterioration. In addition,
The deterioration in market sentiment and escalation of worries
monetary conditions in China eased in July, reversing the
about China and emerging markets raise questions about what
tightening seen earlier in the year. Finally, Fed hikes would be
policymakers will do in China itself and elsewhere, and the
a negative for emerging markets, but any rate hike cycle is
impact on global growth.
likely to be very slow given subdued inflationary pressures.