The Global economic slowdown and market volatility

Market Update

The Chinese economy Slowdown:

The Chinese currency has devalued, which has led investors concerned about further devaluing of the currency, despite the People’s Bank of China’s assurance that there is no basis for sustained yuan depreciation. The manufacturing activity in China has also reduced at its fastest rate in more than 6 years. Economic indicators such as PMIs (Purchasing Managers Index), auto sales and electricity sales are in negative and loan growth and retail sales are falling down. Also important to note here is that the consumer discretionary sector has also announced weak results. Supermarkets and department stores are still losing market share to online players. VIP and high-end spending is still low. Oil companies have also shown a decline and the demand for physical infrastructure companies has also fallen. This has led to doubts about the country’s economic prospects, leading to weakness in the Chinese economy, eventually leading to slowdown of global economic growth.


 The impact on Emerging Markets:

The selloff in global markets has continued in Asia even today. Shanghai is down 8.5%, Hong Kong’s Hang Seng is down 4.5% and in Tokyo the Topix is off 4.3%. Most markets across Asia Pacific are down between 3-5%. The emerging markets index has also sharply declined to multi-year lows with the MSCI APxJ Index down 21% since April 28th due to several emerging markets experiencing a bear market. For instance, Vietnam and Kazakhstan have also devalued their currencies during the week. The major chunk of Asia’s decline is due to China, which has declined very steeply. In the same period the offshore China MSCI Index is down 27%, the onshore China (A-share) benchmark CSI 300 is down 30%, falling a further 4.5% on Friday. Therefore, for now China is a bigger issue than Greece.


The impact on US economy:

Since, the US economy is mostly US centric, therefore, the global and the Chinese economic slowdown will not have a great impact on the US economy. For instance, the US exports are only 14% of its GDP and the US exports to China are well below 1% of US GDP. However, minor negative impact is expected on the US economy, because revenue exposure and S&P earnings to non-US markets are much higher. Still the global economic slowdown impact on US exports will be minor in terms of GDP.

It is also important to note here that the US corporate earnings have slowed down. There is also uncertainty surrounding as to when the Fed starts increasing the interest rates and at what pace will they keep on increasing. Recently the Federal Reserve stated; “most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” Furthermore, the Fed members were of the view that before raising the interest rates for the first time since the financial crisis they need to have more evidence that the economic growth was strong enough. All these activities have left market participants concerned.

On the other hand, there are some positives taking place in the US economy. For instance. the best gauge of fear in the market; VIX (Volatility Index) has rose by 100% so far in August and was up 25% on Friday. It is on its way for its largest monthly gain since 1990. The job openings are at a record high level, increasing the level of hiring and putting jobless claims to its lowest since the late 1990’s. The positives also include important economic multipliers; such as bank lending going up, along with home construction and business and household formation also moving upwards. Thus, indicating economic expansion. Since net/net, the US is a commodity consumer, as a result weak commodity prices are a major positive for the US consumer and most US businesses. Even though weak commodity prices are bad for some US geographies and some US sectors and they may even be bad for industrial Capex.


Impact on Commodities:

Commodities such as oil and copper felt the impact of a lack of confidence in China’s future economic growth. In terms of oil, on Friday, the WTI was trading near $40/barrel testing investors’ nerves, and the oil prices fell down for the eight week in a row. However, the news that oil output in Saudi Arabia increased to a record high 10.564 million barrels a day in June and an unexpected increase in US crude stockpiles also did not help the falling oil prices.

In Saudi Arabia, to compensate for the lower oil prices, the government is forced to reduce spending. As a result of which the IMF has predicted that the economic growth in Saudi Arabia for this year to slow down to 2.8% and to 2.4% next year. The IMF also predicted a budget deficit of 19.5% of GDP. The IMF also went on to recommend “comprehensive energy price reforms, firm control of the public sector wage bill and greater efficiency in public sector investment”.


Other Asian Markets:

In more positive news Indian Prime Ministers recent historic visit to the UAE brought about positive news including the plan to increase trade by 60% over the next five years between the two countries along with creating a $75 billion fund to support and expand India’s infrastructure.