Group Economics
Macro Weekly Back on track after Black Monday?
Nick Kounis +31 20 343 5616
28 August 2015 US and European equities shook off Black Monday to end the week higher, though the mood remained nervous against the background of worries about China and emerging markets. Two key positives are helping to turn the tide. First of all, policymakers are ready to respond. China eased monetary policy this week and the Fed and ECB have made it clear they are ready to adjust course if need be. Indeed, the risk that the Fed delays hiking rates further, and the ECB steps up QE have increased significantly. In addition, economic fundamentals are more positive than suggested by the extreme worries about the global economy seen earlier in the week. Black Monday
Investor risk sentiment has improved, but still ‘nervy’
The week started off with what has been dubbed ‘Black
Equity volatility indexes
Monday’. Investor risk appetite deteriorated sharply and equity markets collapsed around the world. Emerging market currencies and commodities nose-dived. What happened? The weakness seemed to reflect the fear of a China hard landing and vulnerabilities of emerging markets once the Fed raises
45 40 35 30
interest rates. This combination could provide quite a jolt to
25
global growth. The lack of a response from the Chinese
20
authorities over the weekend seemed to add fuel to the fire.
15
The rebound
10 Jan-15
Mar-15
V Stoxx
During the course of the week, sentiment improved and equity prices rebounded. US and European equities are above their
May-15
Jul-15
Sep-15
VIX
Source: Bloomberg
start of the week levels. Commodities and emerging market currencies have also recovered on the week.
Better fundamentals Markets also received strong support from better economic
Policymakers ready to respond What drove the recovery? Policymakers responded. The People’s Bank of China finally eased monetary policy, cutting its lending rate and reserve requirements for banks, and hinting that more would come in its accompanying statement. Indeed, we expect another 50bp cut in reserve requirement ratios and a 25bp reduction in lending rates going forward.
data, which served as a reminder that fundamentals in the run up to the turmoil were not so bad, easing worries about a global downturn. There were no notable reports out of China, but numbers out of the US and eurozone were impressive. The headline grabber was US GDP growth for Q2, which was revised up to 3.7% from 2.3% previously, with the components pointing to broad-based economic growth. Meanwhile, consumer confidence surged in August. This reflected
Meanwhile, Fed and ECB policymakers made it clear that they are ready to adjust course if need be. New York Fed President
increased optimism on the job outlook, though admittedly it did not cover the most recent period of market weakness.
William Dudley suggested that the FOMC could delay the policy rate hike, saying that the market turmoil had reduced the case for a rate hike next month. Furthermore, ECB Chief Economist Peter Praet hinted at the possibility of a stepping up of the central bank’s QE programme if needed. He asserted that downside risks to the central bank’s inflation goal had risen.
In the eurozone, the bellwether German Ifo business climate indicator rose in August, against expectations of a small decline. The same was the case for the economic sentiment indicator for the eurozone as a whole. In addition, eurozone money supply and bank lending growth accelerated convincingly in July, which is also consistent with an ongoing economic recovery (see chart below).