Risk on Risk off the seesaw continues. Overnight it was the risk ON that captured the markets attention with strong gains on the DOW and S&P (it started with a rally on the Chinese boUrse). The talk now is the stimulus package that the PBoC is throwing at the Chinese economy is seen as a real boost to achieve the long term objective of growth in excess of 7%. From selling off to 1835 (2 weeks ago) the S&P for example has rebounded to 1987 at the time of writing giving a boost to UK and European stock markets this morning. The major talking point and what just about everyone is waiting for is clarity from the FED next Thursday and whether they are willing to risk it and raise rates, or prefer to wait for China to settle down and delay the hike to December or early 2016. The World Bank has come out (like the IMF) and said they believe the FED should DELAY the hike as the repercussions could unsettle the work that is being done in China and the EU. Personally and as I have said many times, I am of the opinion that the FED/FOMC members should make their decision based on how the US economy is faring and based on this and this alone, the time is right for a hike NOW. Pundits have been split in recent weeks since black Monday with the % (if those predicting a hike) dropping from over 50% to the mid 20’s. The US economy is growing at an impressive rate and all the signs point to years of lean growth as the US economy cements its place as the world’s greatest economy. China no doubt are delighted with this as demand in the US for Chinese goods and services increases (we saw yesterday Chinese imports fells while exports, while still negative, were better than expected). It will take time, patience and a great deal of help from the PBoC to get the Chinese economy back to GDP numbers well in excess of 7%. In the meantime the stimulus package that has sent high fives across the pond is for the time being been greeted favourably.
Adding to my comments above from the World Bank’s economist, “The US Federal Reserve risks triggering panic and turmoil in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing. Rising uncertainty over growth in China and its impact on the global economy meant a Fed decision to raise its policy rate next week, for the first time since 2006, would have negative consequences”, Kaushik Basu told the FT. I have great respect for the World Bank but at the same time I do believe the FED should make their decision based on what is good for the US economy rather than what impact the hike would have on EM countries, China and the EU. It is up the individual economies to get their house in order and we have seen only too well what the EU/ECB (€1trn stimulus) and China (cut RRR and ccy devaluation) have done to prop up their regions. Based on this and this alone, the FED should act and then wait and see. A 0.25% hike is really neither here nor there, but what it does is show INTENT and CONFIDENCE and so the fallout in my opinion would be positive rather than set the EM on fire.
Talking about EM currencies, the ZAR has recovered from 14.00 ag the USD to trade at 13.60, while the TRY is now trading under 3.00 while the CNY has also stepped back from the cliff with the current level of 6.3700 vs the USD. Sadly I still predict EM currencies (ZAR, TRY, MXN, BRL, CNY) will devalue over the coming year as the USD reclaims her place as the leading carry currency (from the EUR currently).
I CANNOT STRESS THIS ENOUGH – IF YOU HAVE ANY FX HEDGING TO DO AND YOU ARE LIKE THE REST ARE UNSURE AS TO WHAT THE FED WILL DO, BEST YOU HEDGE AT LEAST SOME OF YOUR REQUIREMENT AND THEN WAIT AND SEE. NEXT THURSDAY QUITE SIMPLY IS THE MOST IMPORTANT CENTRAL BANK MEETING SINCE THE START OF THE FINANCIAL CRISIS IN 2008. IT IS GOING TO BE M-O-N-U-M-E-N-T-A-L AND WILL SET THE STAGE FOR THE COMING YEARS.
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