Markets continue to trade cautiously after yesterday’s ECB meeting. Initially stocks liked the news from Pres. Draghi however that confidence has been shattered today as markets have returned those gains as fears of Chinese growth still linger. Emerging market currencies got hit but worse sentiment, but regained some ground thanks to Mario Draghi. The ECB kept interest rates unchanged but Mario Draghi mentioned on the press conference that the bank is ready to act if inflation remains low in the Eurozone. What that means is that the QE program the ECB is running might get extended till 2017. That in turn means more money flowing into the financial system and good news for emerging market equities and currencies.
US Non-Farm Payroll came out weaker than expected (+220k) at +173k however the unemployment rate dropped from 5.3% to 5.1% which in turn saw the USD rally on the back of. The GBPUSD has fallen BELOW 1.5200 in early US trading as market traders square their positions ahead of the long weekend in the US.
Emerging market currencies all trading at the lows of the day and the consensus is for these currencies (ZAR, TRY, MXN, BRL, PLN) to continue their weakening stance. As i mentioned above the dire situation in China continues to reverberate amongst EM countries as the slowdown ultimately impacts the demand China has for raw materials and goods/services from these economies. So one must continue to buckle up and the road ahead will remain uncertain and volatile.
There continues to be a larger amount of banks/economists and strategists who are now calling for a delay in US rate hike due on the 17th of September. The worsening China situation and EM rout they contend will force Pres. Yellen and her FOMC colleagues to delay the hike until things settle down. While I understand and to an extent agree with their sentiments, the U.S. economy continues to strengthen, driven by domestic forces. These forces are (on the face of it) unlikely to be derailed by a slowdown in China or other emerging markets and therefore I still believe a 0.25% (less than this is a waste) is still very much on the cards.
Time will tell….have a great weekend
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