With just 10 days to go before the FOMC meeting (17 Sept) you can imagine the debates that are currently raging throughout the banks, hedge funds, pensions funds, asset managers and Mr and Mrs Smith’s kitchen. With the exit of the threat of GREXIT back in June the FED breathed a sigh of relief (and then as we have been saying repeatedly over the past few months every time more bad data from China was published that more needs to be done), bang the world wakes up and decides the China situation is in fact worse than expected. In a nutshell we are a long way away from sorting that little issue out. Getting China back to growth levels they are accustomed is a little different from getting Troika and Syriza to talk. So as mentioned previously, buckle up tight because the road ahead is going to be rocky and uneven. Expect further rate cuts and (potential) currency devaluation and more importantly expect more volatility as the markets tries to second guess what the PBoC are likely to do. In a way I bet they (China) are delighted to see the US in such a “healthy” state because the knockoffs and spin offs from such growth will no doubt be felt in all corners of the world which in turn will aid the growth China so badly needs. It is for that exact reason WHY the US authorities have been so shtoom (quiet) when the PBoC devalued the CNY. You see no one country can live in a vacuum. They all need each other and therefore you will notice there is less rhetoric coming from the both the FED and PBoC this time round. Given what we are witnessing and have witnessed, I am going to put my neck on the line and say I STILL THINK and BET the FED/FOMC will raise rates by 0.25% next week, and then wait perhaps into 2016 before pulling the trigger again. I cannot see why the hike would disrupt what the FED are attempting to achieve and more importantly it will send a signal (and a strong one at that) that we have turned the corner and the financial crisis of 2008 is now behind us – a STRONG CONFIDENT STATEMENT that should in turn give (EM)economies the confidence to power ahead.
So its really all to play for. I would like to think the majority of the FOMC members feel and think the same way as I do and as Mohamed El-Erian recently noted in one of his daily commentaries (that the FED must not lose this opportunity of raising rates).
Overnight, the NDRC (The National Development and Reform Commission) said that it expects China’s economy to continue expanding at a steady pace, and meet the government’s annual growth target of 7%. The NDRC’s view is shared by Finance Minister Lou Jiwei, who said Saturday at a meeting with central bankers and finance ministers from the G20, that China’s growth will stay around 7% in the next four to five years. At the two-day G20 meeting in Ankara, Turkey, Chinese central bank governor Zhou Xiaochuan also said that China’s financial markets are expected to become “more stable” after the recent rout. The correction in the stock market is almost complete, while the Chinese yuan is steadying after a devaluation last month, said Mr. Zhou. Given what has been said then, I expect the markets to “give it some time” and see how the data looks before reversing the recent rout we saw on “black Monday”. Confidence is returning, but just like the events that led to black Monday, it will take time to see “happy Monday” return.
US holiday today – expecting markets to trade sideways
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