The IMF annual meetings have been filled with a series of stark warnings, but will a "triad" of challenges for the global economy trigger a fresh crisis? It's a cloudy morning here, is that the feeling of the global markets?
While rain here almost always materialises, the weather during the International Monetary Fund’s latest annual meeting captures the gloomy mood.
This week, the fund said global growth this year would be the slowest since the Great Recession. A separate report by the fund warned that the world faced a “triad” of challenges that meant policy missteps could wipe a massive 3pc off global growth.
Corporate borrowers in emerging markets could default en masse when the US raised interest rates, it said. A new credit crunch, a fresh financial crisis: these were the risks facing the global economy.
For Andy Haldane, the Bank of England’s chief economist, recent market ructions and concerns about the health of the Chinese economy could be the beginning of the latest chapter in a three-part “crisis trilogy”.
As China’s three-decade growth miracle comes to an end, the “Anglo-Saxon” crisis of 2008, which was followed by the eurozone’s meltdown in 2011, now threatens to metastasise in emerging markets.
But while it’s clear that China’s double-digit growth rates have come to an end, how low can growth go? And who will be the biggest losers from the end of the commodity boom?
Parallels with yesteryear
While it’s been almost 50 years since the IMF held an annual meeting in South America, some things don’t change.
In 1967, when members convened in Rio de Janeiro, Brazil, the fund was led by Pierre-Paul Schweitzer, a French lawyer who took the helm at a time of expansion and creation of the special drawing rights (SDR) club of elite currencies.
“The new world is lower commodity prices which are going to stay low for the foreseeable future"
Mauricio Cárdenas, Colombian finance minister
Christine Lagarde, also a French lawyer, leads the fund at another critical juncture, where quota reform is badly needed and the IMF’s advice – on Greece for example – has not always been heeded.
Pessimists point out parallels between today’s ructions and the Asian crisis of the 1990s. A stronger dollar has sucked money out of emerging economies and back into the rich world, pushing down the value of emerging market currencies.
Optimists say flexible exchange rates have helped to cushion the impact of the downturn, not hinder it, while stockpiles of foreign reserves also provide ammunition to fight off a full-blown crisis.
Mauricio Cárdenas, the country’s finance minister, describes the situation facing Latin America and other emerging market economies as a simple one: accept reality or deny it.
“We’re in a new world,” he says. “The new world is lower commodity prices which are going to stay low for the foreseeable future. At the same time there is going to be less global liquidity. The US is going to start raising rates in the near future so we’re not making any expectations that we will go back to where we were five or six years ago.”
Colombia has taken difficult decisions as its oil revenues have dwindled. The country announced $2.4bn (£1.6bn) of budget cuts earlier this year and has warned of more belt tightening in the coming months.
Cárdenas believes the currency is reaching a new equilibrium of about 3,000 pesos to the dollar. A year ago, it was 2,000. As the currency depreciated, Colombia’s central bank raised interest rates in September in a signal that it takes its 2pc to 4pc inflation target seriously, despite flagging growth.
For Cárdenas, credibility has been hard won and he believes keeping Colombia’s house in order will pay off in the long run. “We thought in advance about this situation. We thought: as oil prices have been falling, we will be investing more in infrastructure so this expansion is offsetting from an aggregate demand point of view the decline in oil rates,” he says.
Cardenas remains confident that Colombia can still flourish without relying on others.
“Whether we succeed is going to be less about the tailwinds from China and from global liquidity from QE, it’s more about us.
Previously all countries were surfing on the same wave at the same pace. Now it’s about who is the better swimmer, who has less weight, who has a better sense of direction. Those abilities are going to reflect differences from country to country.”
If Colombia shows how an economy can weather a storm, then the current situation in Brazil serves as a cautionary tale for those who choose profligacy over prudence.
The IMF expects the economy to contract by 3pc this year, and 1pc in 2016 as the economy buckles under the strain of falling commodity prices, high inflation and unemployment.
Brazil’s credit rating was cut to “junk” status by Standard & Poor’s in September, taking away the investment grade it had enjoyed for seven years.
Its economic troubles have been compounded by political turmoil. A corruption scandal involving state-run energy firm Petrobras has led to a call for the impeachment of president Dilma Rousseff and left her popularity in tatters.
Amid all this, the unpopular government is trying to introduce measures to balance the books.
You have to adapt to the new reality or end up like Brazil
Ilan Goldfein, former deputy of Brazil's central bank
For Ilan Goldfein, chief economist at Itau, Brazil’s largest private bank, and a former deputy governor of the country’s central bank, sorting out the budget deficit will be crucial to bring investment back into the country.
“You have to adapt to the new reality, and the new reality is that terms of trade are different. Commodities are very different. You can either accept or deny this. If you accept it then you have to tailor your budget to different prices. Oil in Colombia, copper in Chile, iron ore in Brazil: all the commodity producers just have to realise it’s a different business now.
While attempting to spend your way out of trouble is not recommended, targeted infrastructure investment that could raise growth in the short and medium term, is.
Peru declared a public holiday on Friday to coincide with the IMF annual meeting. The main reason? To keep cars moving in a city where traffic jams are notorious. "I think the traffic in Lima is even worse than Bogota," jokes Cardenas.
So what lies in store for the countries that do not adjust? “They will end up like Brazil,” says Goldfein. “Brazil basically denied the reality for four years. The diagnosis was: something is happening, the government is not stimulating enough, we are not spending enough, there is not enough credit, there are not enough public subsidies so we should just push, push, push.
“But in the same way Brazil benefited from the boom, it now has to deal with the bust.”
'Holy Grail' of global growth
The dilemma now facing emerging markets has posed a bigger question: where is growth going to come from now that the emerging market engine is stalling?
Maurice Obstfeld, the IMF’s new chief economist, said last week that the “holy grail” of robust global growth remained “elusive” – six years on from the Great Recession.
Central banks around the world have cut interest rates more than 600 times since Lehman Brothers collapsed, yet this has not been enough to secure the recovery.
Obstfeld’s predecessor, Olivier Blanchard, who retired from the post at the end of last month, is more upbeat than the tone of the latest IMF health checks suggest.
Blanchard is used to hearing the Financial Stability Report forecasting the end of the world every six months. “At this stage, I’m not very worried. Sure, the baseline is unexciting. Sure, there are risks, coming from the real economy or the financial sector. The nature of the risks keeps changing. But I don’t think at this stage the risks are larger than they have been in the recent past,” he says.
Blanchard is particularly calm about China, and says claims that economic growth could be slowing to an annual pace of between 2pc and 3pc are not based in fact. He says the IMF spent a lot of time talking to Chinese policymakers over the summer.
"Over time, China growth will slow down, but the probability that it will suddenly collapse to 3pc to 4pc or less is small."
Consumer spending remains strong, he says, while housing investment, which has already fallen sharply, is no longer in danger of collapse. The problem is state investment he says, and while preventing Schumpeter’s gale from blowing unproductive companies down is not ideal, he believes the state could ensure that a hard landing stemming from this sector is avoided.
“Over time, China growth will slow down, but the probability that it will suddenly collapse to 3pc to 4pc or less is small,” he says.
Gentle slowdown or not. China remains one to watch.
"The management of China's slowdown is something we've been worried about and it's starting to manifest - so that makes you worry that the downside risk could be greater," says one UK policymaker.
"But we're not in the sky is falling mode. I would say that's the way people are leaving here, with that mindset."
"China has got massive issues - they've had those for 30 years and have managed them.
"I think this will weigh on Chinese growth for most of the next decade. Are they locked in a world of 6pc, stepping down to 5pc growth? I think so. A big middle-income country growing at 5pc is a lot - but it's not what it was."
China’s Shanghai Composite Index plummeted more than 9% during the session Monday, and closed down 8.5% pushing equity markets in Asia to give up their 2015 gains. Hong Kong’s Hang Seng tumbled 5.17%, while Japan’s Nikkei dropped 4.61%. So how will this affect our Markets?
One session after the Dow officially entered correction territory, Wall Street appeared set to extend a selloff in global equity markets as worries about significant deterioration in China sparked fear in the minds of investors around the world. The concern comes as traders wonder what the next shoe to drop is from Chinese officials to stem the bleeding. The world’s second-largest economy moved two weeks ago to devalue its currency, the yuan, on the heels of continued weakness in its economic data.
As the carnage spread from China, European equity markets didn’t fare much better. The Euro Stoxx 50, which tracks large-cap companies in the eurozone, declined 3.73%, plunging further into correction territory after notching its worst week in four years last week. The German Dax shed 3.53%, while the French CAC 40 sank 3.87%, and the UK’s FTSE 100 dropped 3.44 %.
McCaig pointed out that August is typically known as a quiet month for action in the equity markets as investors seek relaxation amid summer’s last days. However, this year is an exception to the rule.
Commodity markets couldn’t escape the bloodletting as crude prices sank to fresh six-year lows. U.S. crude dropped 3.46% to $39.04, while Brent, the international benchmark declined 3.65% to $43.80 a barrel.
Gold dipped 0.20% to $1,157 a troy ounce as it tried to hang on to a seven-week high, while silver dropped 2.50% to $14.96. Meanwhile, aluminum and copper hit their lowest levels since 2009.
In a flight to safety, traders snapped up 10-year U.S. Treasury bonds. The yield fell 0.090 percentage point to 1.960%, the lowest level since April.
In currencies, meanwhile, the euro jumped 0.89% against the U.S. dollar, while the greenback gained 0.24% against the Chinese yuan.
I read on FoxBusiness.com last night that their writers are reporting that the American market will rebound this week. Given the instability in the world. I feel that a larger correction is still in progress and we have not seen the bottom of the market correction yet.
Global-growth concerns with the backdrop of the Fed’s latest meeting minutes ignited a selloff on Wall Street Thursday as U.S. stocks followed global markets lower.
The Dow Jones Industrial Average sank 358 points, or 2.06% to 169901. The S&P 500 shed 43 points, or 2.10% to 2035, while the Nasdaq Composite plunged 141 points, or 2.82% to 4877.
All ten S&P 500 sectors were in negative territory as consumer discretionary lead the way. The sector plunged 2.80% to close the session.
Currency and Treasury Bonds
In currencies, the U.S. dollar fell 0.10% against the yuan, while the euro gained 0.73% against the dollar.
The yield on the benchmark U.S. 10-year Treasury bond fell 0.035 of a percentage point to 2.094%.
Wall Street suffered steep losses amid a global market selloff as the Dow fell below the psychologically-significant 17000 mark, and the lowest level since October 30. Traders in the U.S. fretted about global growth and what a slowdown could mean for the Federal Reserve’s decision about when to begin hiking short-term interest rates.
Media and social stocks were slammed during the session as big names in the space including Disney (DIS), Time Warner (TWX), and Twitter (TWTR) came under intense selling pressure on the back of a downgrade for Disney and Time Warner to “market perform” from “outperform” from Bernstein thanks to a decline in ad revenue.
Twitter shares plunged 6%, falling to a new all-time low of $25.92, that’s below the company’s $26 IPO price.
Volume on the session was about 7% above the one-month average.
On Wednesday, minutes from the FOMC’s July policy meeting showed the central bank considered the labor market to have strengthened, but worried that inflation would run well below its 2% target as far out as through 2017. Many on the Street speculated that the minutes reflected too much hesitation and concern for the stability of the economy to go ahead with a much-talked-about September rate hike.
“An interest-rate hike in September isn’t off the table, but it is less likely now, and an uncertain macro picture will keep pressure on the U.S. market, even if interest rates stay at record lows next month,” David Madden, IG market analyst said in a note.
The Housing Market Looks Okay...For Now
On Thursday, the latest reading on the housing market showed existing single-family home sales jumped to an eight-year high in July. Sales rose 2% for the month to an annualized rate of 5.59 million units. The reading from the National Association of Realtors was higher than the increase to 5.44 million units Wall Street forecast.
The Real Worry is Global Economy
It wasn’t just domestic action that spooked U.S. investors. Focus was also overseas in China where equity markets saw another day of steep declines on the back of last week’s yuan devaluation that’s sparked a currency trickle-down effect to other nations. China's stock market is dropping fast and the People's Bank of China is trying to adjust.
“The great worry is that China will undergo a dramatic drop in the rate of growth, and the knock-on effect to Europe will damage the recovery,” Madden wrote. “The PBoC’s decision to intervene in the currency market has done little to restore confidence in the Chinese stock market, and dealers are dreading that more intervention will be required.”
China’s Shanghai Composite index dropped 3.43%, while Hong Kong’s Hang Seng officially fell into bear-market territory, dropping 20% from a recent high. The index declined 1.77% on the session, while Japan’s Nikkei shed 0.94%.
Jitters spread to European equity markets where investors there also worried about effects of China’s shaky markets, and wondered what the Fed’s move will be in September. The Euro Stoxx 50, which tracks large-cap companies in the eurozone, plunged 2.23%. The German Dax dropped 2.34%, the French CAC 40 shed 2.06%, while the UK’s FTSE 100 declined 0.56%. This Bring us to our next, never ending subject...Greece. The nation’s prime minister, Alexis Tsipras, announced Thursday he will resign from his post, and hold snap elections in September. “Greece will never settle and be fully compliant with the terms of the bailout agreement,” IG market analyst Joshua Mahony said in a note. “Greece wants to remain within the eurozone and receive creditor funding while rejecting austerity. Something has to give.”
First let me state, that I am not a Stock Market Analyst, just a Middle School Math Teacher. However I do study trends, and one trend I have paid close attention to lately is the trend of what the stock market may do in September to October 2015. Before I begin let me give you an overview of the reasons why I feel we are pointing toward a down trend, a.k.a. a bullish market. This being why I have moved all of my I.R.A.'s to fixed accounts.
The stock market has been moving steadily higher since bottoming in March 2009, Remember those days, when even low-risk investors were losing most of their retirement funds? Since that time, The New York Stock Exchange (NYSE) is up 165%, and is in record territory, while the NASDAQ is up 275%. Our economy is not this strong yet, considering we have a National Debt of $18.3 trillion, with a "T".
The most popular stock market indices have followed a similar trajectory. The S&P 500 is probably the best overall index when it comes to measuring the health of the U.S. economy, because it captures approximately 80% of the available market capitalization.
The S&P 500 climbed 8.1% in 2012 and 30% in 2013. It’s up 12% year-to-date and has climbed more than 210% since early 2009. In August 2014, it broke through 2,000 for the first time ever and is closing in on 2,100.
Even when the stock markets are in full correction mode, the reversal is short-lived. In late September, over the span of three weeks, the NASDAQ and NYSE were both in correction mode, having given up more than 10% of their value and erasing all of their gains made in 2014. Both markets rebounded in short order, soaring back during the latter part of the month, fueling investor optimism.
Remember, stock markets are only as strong as the companies within them. On the surface, all looks well, but it isn’t. That’s because the U.S. economy, while improving, is extremely vulnerable. So maybe the idea of a major stock market collapse or correction in 2015 isn’t that big of a stretch.
The U.S. unemployment rate may have slipped below the six-percent threshold, but a large number of Americans--roughly 12%—remain underemployed. Inflation is on the rise, except at the gas pump, which could change, after 2016. In the workforce, wages have been flat and, perhaps not coincidently, approximately 15% of the U.S. population is on food stamps.
Personal spending may be accelerating, but so too are debt levels. We may be spending, but we aren’t paying with cash. As the world’s biggest economy and largest consumer market, 71% of the country’s gross domestic product (GDP) came from consumer spending in 2013. All things considered, this is not a recipe for sustainable growth, one might even say it is "inflated growth" which will eventually pop. Coupled with the fact that we are in the seventh year of a market trend. (View the Picture below).
In November 2008, the Federal Reserve stepped in with its generous bond-buying program (QE) to help kick-start the economy after it slipped into a recession. Artificially lowering the short-term lending rate to nearly zero was supposed to make banks lend more money to businesses and people.
The ultra-low-interest-rate environment has made it cheaper to borrow money—and is recognized as being the fuel that has propelled the stock market higher. The Federal Reserve has hinted it will start to wean investors off cheap money in 2015, when it begins to raise interest rates.
Raising interest rates by just 50 basis points could have a serious, negative impact on the broader economy and, by extension, the U.S. stock market. Continued economic challenges in the eurozone and Asia will also have a detrimental affect on the U.S. stock market.
Not to mention geopolitical tensions between Russia, Ukraine, and the entire euro-zone; icy relations between the U.S. and Russia; growing issues between China and the U.S; and concerns arising between China and Japan, all will play a part of what I see as a market downturn, but remember, I'm just a Middle School Math teacher.