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BUSINESS & FINANCE
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STEPHEN S. ROACH
Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of the new book Unbalanced: The Codependency of America and Chin… READ MORE
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PrintJUL 27, 2015 7
Market Manipulation Goes Global
NEW HAVEN – Market manipulation has become standard operating procedure in policy circles around the world. All eyes are now on China’s attempts to cope with the collapse of a major equity bubble. But the efforts of Chinese authorities are hardly unique. The leading economies of the West are doing pretty much the same thing – just dressing up their manipulation in different clothes.
Take quantitative easing, first used in Japan in the early 2000s, then in the United States after 2008, then in Japan again beginning in 2013, and now in Europe. In all of these cases, QE essentially has been an aggressive effort to manipulate asset prices. It works primarily through direct central-bank purchases of long-dated sovereign securities, thereby reducing long-term interest rates, which, in turn, makes equities more attractive.
Whether the QE strain of market manipulation has accomplished its objective – to provide stimulus to crisis-torn, asset-dependent economies – is debatable: Current recoveries in the developed world, after all, have been unusually anemic. But that has not stopped the authorities from trying.
In their defense, central banks make the unsubstantiated claim that things would have been much worse had they not pursued QE. But, with now-frothy manipulated asset markets posing new risks of financial instability, the jury is out on that point as well.
China’s efforts at market manipulation are no less blatant. In response to a 31% plunge in the CSI 300 (a composite index of shares on the Shanghai and Shenzhen exchanges) from its June 12 peak, following a 145% surge in the preceding 12 months, Chinese regulators have moved aggressively to contain the damage.
Official actions run the gamut, including a $480 billion government-supported equity-market backstop under the auspices of the China Securities Finance Corporation, a $19 billion pool from major domestic brokerages, and an open-ended promise by the People’s Bank of China (PBOC) to use its balance sheet to shore up equity prices. Moreover, trading was suspended for about 50% of listed securities (more than 1,400 of 2,800 stocks).
Unlike the West’s QE-enabled market manipulation, which works circuitously through central-bank liquidity injections, the Chinese version is targeted more directly at the market in distress – in this case, equities. Significantly, QE is very much a reactive approach – aimed at sparking revival in distressed markets and economies after they have collapsed. The more proactive Chinese approach is the policy equivalent of attempting to catch a falling knife – arresting a market in free-fall.
There are several other noteworthy distinctions between China’s market manipulation and that seen in the West. First, Chinese authorities appear less focused on systemic risks to the real economy. That makes sense, given that wealth effects are significantly smaller in China, where private consumption accounts for just 36% of GDP – only about half the share in more wealth-dependent economies like the US.
Moreover, much of the sharp appreciation in Chinese equity values was very short-lived. Nearly 90% of the 12-month surge in the CSI 300 was concentrated in the seven months following the start of cross-border investment flows via the so-called Shanghai-Hong Kong Connect in November 2014. As a result, speculators had little time to let the capital gains sink in and have a lasting impact on lifestyle expectations.
Second, in the West, post-crisis reforms typically have been tactical, aimed at repairing flaws in established markets, rather than promoting new markets. In China, by contrast, post-bubble reforms have a more strategic focus, given that the equity-market distress has important implications for the government’s capital-market reforms, which are viewed as crucial to its strategy of structural rebalancing. Long saddled with a bank-centric system of credit intermediation, the development of secure and stable equity and bond markets is a high priority in China’s effort to promote a more diversified business-funding platform. The collapse of the equity bubble calls that effort into serious question.
Finally, by emphasizing a regulatory fix, and thereby keeping its benchmark policy rate well above the dreaded zero bound, the PBOC is actually better positioned than other central banks to maintain control over monetary policy and not become ensnared in the open-ended provision of liquidity that is so addictive for frothy markets. And, unlike in the West, China’s targeted equity-specific actions minimize the risk of financial contagion caused by liquidity spillovers into other asset markets.
With a large portion of China’s domestic equity market still closed, it is hard to know when the correction’s animal spirits have been exhausted. While the government has assembled considerable firepower to limit the unwinding of a spectacular bubble, the overhang of highly leveraged speculative demand is disconcerting. Indeed, in the 12 months ending in June, margin financing of stock purchases nearly tripled as a share of tradable domestic-equity-market capitalization.
While Chinese equities initially bounced 14% off their July 8 low, the 8.5% plunge on July 27 suggests that that may have been a temporary respite. The likelihood of forced deleveraging of margin calls underscores the potential for a further slide once full trading resumes.
More broadly, just as in Japan, the US, and Europe, there can be no mistaking what prompted China’s manipulation: the perils of outsize asset bubbles. Time and again, regulators and policymakers – to say nothing of political leaders – have been asleep at the switch in condoning market excesses. In a globalized world where labor income is under constant pressure, the siren song of asset markets as a growth elixir is far too tempting for the body politic to resist.
Speculative bubbles are the visible manifestation of that temptation. As the bubbles burst – and they always do – false prosperity is exposed and the defensive tactics of market manipulation become both urgent and seemingly logical.
Therein lies the great irony of manipulation: The more we depend on markets, the less we trust them. Needless to say, that is a far cry from the “invisible hand” on which the efficacy of markets rests. We claim, as Adam Smith did, that impersonal markets ensure the most efficient allocation of scarce capital; but what we really want are markets that operate only on our terms.
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Aug 3 2015 at 12:15 AM Updated Aug 3 2015 at 12:26 AM
Warren Hogan's warning for a low-growth world
Warren Hogan of ANZ Bank at their Sydney offices. Anthony Johnson
Philip Baker
by Philip Baker
It was a case of mistaken identity when a big-name investor in London discovered Glenn Stevens, the governor of the Reserve Bank, had just delivered the inaugural memorial lecture to recognise the life of Warren Hogan.
Initially he was shocked that the Warren Hogan he knew at ANZ had passed away, but was perhaps also more than just a little perplexed that he had received a tribute like that from one of the world's leading central bankers.
The young Warren Hogan still jokes how he can be confused for his legendary father, who made a significant mark in the field of economics, including 30 years as a professor at Sydney University where he taught Stevens and the Prime Minister Tony Abbott.
Among his other achievements, Hogan senior was a board member at Westpac from 1986 to 2002 where he had to stand up to Kerry Packer when Packer made an aggressive play to take control of the bank in the early 1990s.
He also spent time on the board at AMP and the Australian Guarantee Corporation, was a professor at the School of Finance and Economics at the University of Technology in Sydney, and advised John Howard in Opposition and again when he was Prime Minister.
FINANCIAL PEDIGREE
With that sort of pedigree it is perhaps hardly surprising that a young Warren Hogan ended up being an economist.
Indeed, three of his four siblings are also economists.
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But it wasn't always that clear cut.
"When I was young of course I didn't want to be an economist, my dad was. And then I went to Macquarie Uni, because I thought it would be better if I didn't go to the same uni as him," says Hogan.
"He had very high standards around these things and if he was at Sydney Uni he probably wouldn't have helped me, so I went to Macquarie Uni. That's actually where I did accounting, finance and economics, and realised how interesting it all is."
Hogan took his father's advice after he graduated, with an honours degree, and got into the financial markets rather than head to Canberra, which back then was probably still the more time-honoured path for a career in the sector.
His first job was as a graduate economist at NSW's T-Corp, but he's also had stints at Credit Suisse and Westpac before ending up at ANZ 10 years ago.
Indeed, he was close to being appointed the chief economist at ANZ just as his father was close to passing away.
"He had a brain tumour, was in hospital for four weeks and so we had lots of conversations and because he had been on the board at Westpac and I had worked there for a couple of years, I said to him, 'I think I'm in for a good shot'. But due to him I always wanted to be the Westpac chief economist," says Hogan.
But at that point the son was given some good old-fashioned fatherly advice: "Take whatever you can get, son".
One aspect of his job at ANZ that Hogan really enjoys is being able to communicate. Which is just as well.
In the past he's done as many as 435 presentations in one year, while since October he's been out of the office travelling almost 50 per cent of the time. It doesn't leave a lot of time for his other interests including cooking and golf, where his handicap is still a respectable 16.
Hogan is also on Twitter, providing regular updates on the economy and financial markets and writes for BlueNotes, the bank's in-house publisher.
"I think one of the things we do as bank economists is try to communicate to a broad audience complicated concepts. I think Australia really learnt about economics in the 80s under Keating and Hawke and it's a wonderful challenge to think about how the future will play out," he says.
LOW-GROWTH FUTURE
The future that Hogan can see now is one of low growth, and as a result very little risk taking from businesses and corporates.
"One thing that really jumps out to me, and it's already happening, is that basically in a world where there is less return and less growth, there's also less room for error," explains Hogan.
It means that fund managers have to be very careful with the risks they take, because in a low-yield environment with low growth they won't be rescued by another part of their portfolio if they lose money.
The same applies to business. If there is low nominal growth there will be low top-line revenue growth and any investment really has to pay off.
"Every business is challenged by top line revenue growth. Any macro business, be it a big consumer business, logistics, services or banking, we are in one way shape or form linked to the nominal growth of the economy and that's our top line revenue growth," he says.
But the risk of getting it all wrong is so much greater when there is no growth around.
"It's the same story for businesses. Where there are six projects out there and you get one of them wrong then it ruins the return on all the others. So that means the level of precision has got to be higher," he says.
That's why in corporate Australia there is so much caution right now because people don't want to deploy capital and get it wrong.
He sees that as one of the big secular themes out there that's really having a big impact but is perhaps not fully understand yet.
"With not a lot of growth in the economy, I call it great to good. That is what we once thought was good growth is now great growth and what was once whatever – not great, is now good. The world is harder. I think the fundamentals of modest population growth, natural economic growth and question marks, globally and locally about the ability of economic reform or technology to add to productivity, all means that we are going to be running much lower growth," he says.
SECULAR VERSUS CYCLICAL
The other big change he sees in the world right now has to do with the theory, regarding secular versus cyclical.
"In the old days it was just all cyclical. In the 90s we thought about some of the secular stuff, but still the focus was cyclical, especially for markets and money management, but even corporates. The secular stuff was secondary," he says.
But that's about to change.
"What's going on I believe now is that the secular stuff is dominating the cyclical and it's really profound in how the world works. So the first thing is it takes volatility out of the economy – on a year by year basis – and potentially out of markets," Hogan says.
Hogan also has some strong views on China and rising interest rates in the US, two issues causing a lot of angst in financial markets right now.
He thinks the Federal Reserve will be lucky to get away with one or two rate hikes in this first phase but says it's hard to see the Fed funds rate getting above 2 per cent over the next five years.
"That's one thing about the cyclical and the secular. Interest rate cycles might look very different to what we've been use to in the past. They're not like up and down and up they might sort of be very truncated and extended. You might get sort of a few up and a few down then a lot up and a lot down," he says.
CHINA SLOWDOWN, OR NOT
When it comes to China he believes there needs to be a slowdown for the economy to be sustainable – although that means a growth rate of around 5 per cent to 6 per cent.
If, however, that kind of rate is not politically acceptable, or is seen as a failure, or causes unemployment to rise and policymakers resist it, then Hogan says it could cause some damage down the track.
"I'm not worried about China in the next year or two but I'm worried they could now be laying the foundations for a bigger problem down the track. The Chinese authorities have proved to be extraordinarily adept at reading these risks and how they've got to this point is incredible. And that is what I see as the major issue right now.
"The likelihood is that they are not going to give us the same amount of growth in one one way or another as we thought a year ago. There is growth out there but a tougher environment," he says.
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Aug 5 2015 at 12:15 AM Updated 1 hr ago
'Three gluts' to shape the global economy, PIMCO says
The oil gut oil glut has helped mitigate the depressing impact of the savings glut on consumer demand by shifting income from rich oil producers to consumers, PIMCO's global economic adviser Joachim Fels has told clients. Carlos Garcia Rawlins
by Jonathan Shapiro
From the folks who brought you the "new normal" and the "new neutral", welcome to the world of the "three gluts". That's the descriptive phrase of the global economy offered by global bond fund PIMCO and its newly appointed economic adviser Joachim Fels.
In his first missive since joining the US-based bond fund in February, Mr Fels said global macroeconomic forces would be defined by the "the three gluts" – of money, savings and oil.
Cheap money and energy would spur an economic recovery but an abundance of savings would keep global interest rates in check, Mr Fels said in a note to clients.
"While the global savings glut is likely the main secular force behind the global environment of low growth, 'lowflation' and low interest rates, both the oil and the money glut should help lift demand growth, inflation and thus interest rates from their current depressed levels over the cyclical horizon," he said.
Mr Fels spent 19 years as chief economist at Morgan Stanley, where he built a large following, and was a key hire by PIMCO as senior management sought to steady the ship after the departure of "bond king" Bill Gross triggered hundreds of millions of dollars of out flow.
Under Mr Gross and Mohammed El-Erian, the fund coined ubiquitous phrases such as the "new normal" to describe a prolonged period of low growth after the global financial crisis and more recently "a new neutral", a shift lower in the interest rate setting, where conditions were neither loose nor tight.
Mr Fels said the "savings glut" was coined by former Federal Reserve chairman Ben Bernanke to describe a desire globally to save more than the desire to invest, an imbalance that has increased over the past decade to force interest rates even lower.
DEMAND TO SAVE
There were several reasons why the demand to save was greater than the demand to invest, Mr Fels said. They were: history, with consumers still scarred by the financial crisis; demography, with savers living longer; inequality, with the rich saving more than the poor; technology, with new companies able to expand with little investment; and necessity, with emerging market companies dealing with capital flight risks.
The savings glut had led to weak demand, which "for a long time slows potential growth and turns into permanent joblessness, while weak investment dents the growth of the capital stock", Mr Fels wrote.
He said if governments failed to fill the demand and if central banks could not force rates down enough, or into negative territory, "they have to resort to blowing pretty bubbles in the financial markets, in order to avoid worse outcomes".
But there was good news in the form of an oil glut, which had helped "mitigate the depressing impact of the savings glut on consumer demand" by shifting income from rich oil producers to consumers, he said.
The initial negative impact from the falling oil price on US investment in the sector would be replaced by stronger demand as consumers reaped the benefits of lower gas prices on their budgets, he said.
The third glut, the "money glut", was a consequence of the savings and oil gluts, he said. An abundance of savings had encouraged central banks to lower interest rates to find the equilibrium level to spur investment. This had been reinforced by the oil glut, which had lowered inflationary pressure, resulting in "a wave of central banks easing steps around the world since the start of the year".
There would be more monetary easing in 2015 from China and other commodity-producing countries, which were expected to follow the European Central Bank and the Bank of Japan, he said.
The net impact of these three gluts would be for global growth, inflation and interest rates to remain lower than previously to reflect the savings glut, but for a cyclical pick-up in economic growth and inflation to occur as a result of cheap energy and stimulatory policy, he said.
For bonds investors, any rate rises resulting from a pick-up in growth would be tempered, leading the Federal Reserve on "a long but shallow hiking path".
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Aug 7 2015 at 8:11 AM Updated 1 hr ago
Bond king Bill Gross frets US may lift rates as emerging markets crisis deepens
Bill Gross, formerly of Pimco, points out that US market weakness also reflects the carnage in emerging market currencies, now suffering their biggest decline since the financial crash. Jim Young
by Karen Maley
As investors watched on with dismay as the US share market slumped overnight, a tweet from bond king Bill Gross highlighted the growing risks from the deepening emerging markets crisis.
Janus Capital @JanusCapital
The US share market's decline reflects woes in the media sector, as investors worry that viewers are cancelling their cable subscriptions and instead turning to the Internet for their viewing. These fears are stripping the glamour from former US share market darlings such as Viacom, Walt Disney and 21st Century Fox.
But the sell-off is also fuelled by fears that next month the US Federal Reserve might lift its key interest rate for the first time in almost a decade. Earlier this week, Dennis Lockhart, the head of the Federal Reserve Bank of Atlanta said he believed the US economy was ready for such a move, and there was a "high bar right now to not acting".
But as Gross, who founded the giant bond fund PIMCO before his acrimonious departure to join Janus Capital last year, notes in his tweet, the US market's weakness also reflects the carnage in emerging market currencies which are suffering their biggest decline since the financial crisis.
Slowing growth in China, the world's second-largest economy, has caused the prices of commodities, such as oil and copper, to tumble. This has led to steep drops in the currencies of commodity producers such as Brazil, Russia, Malaysia and South Africa that are heavily dependent on raw material exports. This nervousness has spread to the currencies of other emerging markets such as Turkey and South Korea.
At the same time, foreign investors, worried about the steep slide in emerging market currencies and believing that US rates could be headed higher, have started pulling capital out of these markets. And this has put pressure on emerging market share markets. The MSCI Emerging Market Index slid a further 0.7 per cent overnight to hit a fresh 52-week low, having now lost 16.2 per cent in the past year.
At the same time, the withdrawal of foreign capital has pushed emerging market bond yields higher, which feeds into higher borrowing costs for both governments and companies in these countries.
But Gross's tweet also points to the vicious circle at work. The plunge in emerging market currencies makes their exports even cheaper, fanning deflationary pressures in the US and the rest of the developed world. What's more, as the spike in borrowing costs slows growth in these countries, their demand for imports shrinks, forcing producers in countries such as the United States and Europe to cut prices in order to boost sales.
This puts the Federal Reserve in an awful dilemma as it weighs up whether to raise interest rates next month. Gross argues that the US central bank is becoming uncomfortably aware that its policy of keeping US rates close to zero is creating distortions in financial markets, while failing to boost economic growth.
As a result, the US central bank is inclined to raise its key interest rates at its September 16-17 meeting, even though there is no sign of any inflationary pressures. Instead, the problems in emerging markets are once again raising the spectre of deflation in global markets.
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OPINION Aug 18 2015 at 4:26 PM Updated Aug 18 2015 at 8:01 PM
Someone's going to be wrong while the share and bond markets are so disconnected
While the sharemarket seems content, the corporate bond market is worried. One of them will end up being wrong.
The Chicago Board Options Exchange Volatility Index rose 3.5 per cent Tuesday to 13. The gauge, known as the VIX, in July posted its biggest monthly drop since February, down more than 33 per cent. AP
Philip Baker
Not since the global financial crisis has there been such a disconnect between the sharemarket and the corporate bond market in the United States.
While the sharemarket seems content, the corporate bond market is worried. One of them will end up being wrong.
Despite the worst earnings season in the US since the second quarter of 2009, the sharemarket doesn't seem to be too fussed at current levels. The S&P 500 is still just 28 points from it's record high.
The broader index has traded a tight range so far this calendar year but is still in positive territory, up 2 per cent, unlike the local sharemarket that has given up all of its gains and is now down around 1 per cent since 2015 kicked off.
But it is the low level of volatility, as measured by the so called "fear" index, the Chicago Board options exchange volatility index, that implies there's nothing too much to worry about when it comes to shares, despite talk the Federal Reserve is poised to raise interest rates for the first time since 2006.
The Vix, as it is sometimes referred to, is now below 13, after being as high as 20 a month ago, a level that is seen as a clear sign that equity investors are very nervous.
But it didn't last too long at the elevated level and back at 13 implies all is well.
The low level of anxiety for equity investors, however, is at odds with the Bank of America corporate bond index that shows the gap in credit spreads between government and corporate bonds hasn't been this wide since 2008.
That suggests the corporate bond market is worried – very worried.
FRUSTRATION AT LACK OF UNDERSTANDING
In the lead up to the financial crisis many bond managers said they were frustrated at their equity peers' lack of understanding of the flow-on effect of the issues in the credit market.
Credit spreads widening means bond investors require a higher yield to buy bonds, implying they need more of a reward to take on the risks.
Normally credit spreads widen as sharemarkets sell off but contract when shares do well.
If credit spreads are blowing out, which can increase the cost of borrowing, it should come as no surprise then that global companies are getting in early and raising money at a record rate to help pay for takeovers before the Federal Reserve makes its first historic move on interest rates.
Almost $US300 billion ($406 billion) of debt has been issued this year, almost three times as much as in 2014, to help fund takeovers of other competitors this year.
Lofty valuation levels – the S&P 500 is trading on a forward price earnings ratio of about 17 times, according to Bloomberg – are forcing companies to issue debt to help fund the takeovers.
It's all a far cry from when the global financial crisis was in full swing. Back then not even quality companies with a decent credit rating could raise money in the bond market.
It wasn't a matter of price, there was simply no price – a most unusual event in capital markets when there is normally a price for everything that moves.
Lenders simply turned their back amid the fallout from the global credit crunch.
Thanks to record-low interest rates around the globe and the amount of cheap money sloshing around it's a lot different these days.
Countries such as Slovenia can lock in funds for as long as 30 years while Rwanda was also welcomed back to international capital markets a few years ago.
Little wonder then that since the end of 2007, total debt worldwide has risen by $US57 trillion, rising to 286 per cent of global economic output, up from 269 per cent.
It's never been easier to borrow money and it's rare that anyone has the luxury of too much money.
But after flooding the system with money for the past seven years, for better or worse, the signs are it's all coming to an end. The US Federal Reserve is poised to hike rates for the first time in nine years.
And the concern is: how exactly how it will all end?
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Aug 19 2015 at 6:11 PM Updated Aug 19 2015 at 6:17 PM
Fed rate moves not behind capital flight, says Pimco strategist
Pimco senior strategist Tony Crescenzi said capital flight from countries such as Brazil and Russia was more a reaction to political issues, weak commodity prices and, in the latter instance, the Ukrainian war, than investors positioning for the US Federal Reserve's expected increase in the funds rate as early as next month.
Daniel Munoz
Mark Mulligan
The first United States interest rate rise in almost a decade is already priced into emerging-market assets, meaning capital outflows and other disruptions are now down to country specifics, a senior strategist at global bond fund firm Pimco says.
Tony Crescenzi said capital flight from countries such as Brazil and Russia was now more a reaction to political issues, weak commodity prices and, in the latter instance, the Ukrainian war, than investors positioning for the US Federal Reserve's expected increase in the funds rate as early as next month.
He said this global movement of investment capital has been under way since Ben Bernanke, then chairman of the US Fed, warned markets of the gradual winding down of monetary stimulus, sparking the now-famous "taper tantrum" of mid-2013.
His successor, Janet Yellen, has since been telegraphing the eventual timing of what is called interest rate "normalisation".
"Markets have been numbed to the first rate hike," Mr Crescenzi said during a visit to Sydney on Wednesday.
"While this is evident in the US bond market, the way it trades today, it might eventually become evident in the more volatile emerging markets when they finally realise that for two years they've been building in the normalisation of policy and perhaps now it's gone too far," he said.
This generalisation of emerging markets, and the overreaction in some cases, had thrown up great investing opportunities, he said.
He cited Mexico, where the risk yield premium over US Treasuries and other benchmarks seemed unwarranted. This made bonds there cheap, and the possible returns generous.
"If one looks at the credit rating of Mexico, it's been consistently improving, even at a time when the US debt picture has worsened, yet yield spreads have continuously widened," he said.
"This creates attractive opportunities in that market."
His comments, from the sidelines of the Portfolio Construction Forum conference, come amid renewed jitters over emerging markets in Asia, in the wake of last week's yuan devaluation by China.
Pimco has been slightly more bearish on Chinese growth rates than many of its peers, seeing it settle at 6 per cent over the next few years from 7 per cent now.
"Pimco's confident in the long-term prospects for China and its economy, and its ability to manage its transition to a more developed economy.
"We do think, however, that it's searching for greater quality over quantity, and will need to slow its growth path in the short run."
He said global markets remained "fixed on the fixing" of China's currency, which is set centrally every day and, until recently, pegged to the US dollar. However, the greenback's sharp appreciation since late last year – because of the promise of higher interest rates – had gradually eroded China's export competitiveness.
With the dust settling after the market upheaval of last week, Mr Crescenzi says China's devaluation was unlikely to upset the US Fed's plans to start lifting interest rates.
"China is aiming for a small-to-moderate devaluation of its currency and is not on a path to a larger one that could potentially create further volatility in markets," he said.
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Economic risk of stock plunge varies around globe
- GREG IP
- THE WALL STREET JOURNAL
- AUGUST 23, 2015 12:26AM
Market meltdown intensifies fears
[Image: 848120-f0fd9d2a-48d8-11e5-b919-aacd51936f38.jpg]
A Chinese car worker at the FAW-Volkswagen plant in Chengdu. China’s slowdown poses a threat to emerging markets. Source: AFP
[b]Does the sell-off in global stock markets spell trouble for the global economy? For the rich world, the answer is no. For example, the US’s six-year-old bull market may be flagging, but its economic expansion is not.[/b]
For emerging markets, it is a bit more worrisome.
They are coping not just with flagging sales to China — especially of commodities — but tougher competition for exports in the wake of China’s currency devaluation.
The result is downward pressure on currencies, upward pressure on interest rates and weaker growth prospects.
Rich countries could benefit because cheaper oil, which briefly dipped below $US40 a barrel on Friday, boosts consumers’ purchasing power.
US stocks tumble on global slowdown fears
Stock markets thrive on two things: cheap money and economic growth.
Investors all year have been bracing for the end of the first as the US Federal Reserve, after holding interest rates near zero since 2008, had until recently looked prepared to raise them in coming months.
There is little evidence economic growth is about to slump, either in the US or other advanced economies.
Manufacturing activity actually accelerated a bit in the eurozone and Japan in the past month, while expanding at a slightly slower rate in the US, according to purchasing-manager surveys released on Friday by financial-information provider Markit.
The US economy got off to a sluggish start this year, with gross domestic product — the broadest measure of all goods and services produced — growing at an annual rate of just 0.6 per cent in the first quarter and 2.3 per cent in the second.
But recent data on retail sales and housing have been relatively upbeat. Economists surveyed by The Wall Street Journal expect the US government to revise that second-quarter gross domestic product figure up to 3.3 per cent next Thursday. Employment continues to grow rapidly.
Economic expansions usually end because central banks raise interest rates significantly to head off inflationary pressure, or because of some sort of shock, such as a financial crisis. Neither is in sight.
Even though unemployment in the US is falling toward the 5 per cent level usually associated with “full employment,” this has yet to put upward pressure on wages, suggesting the economy is still operating below its normal capacity.
In Europe, the cyclical outlook is even more bullish. The European Central Bank is buying bonds as part of a “quantitative easing” policy launched earlier this year. The drop in the euro has made exports more competitive. And the legacy of back-to-back recessions means unemployment is far above normal levels, leaving plenty of spare capacity to grow.
[Image: 847246-f69d3f56-48d8-11e5-b919-aacd51936f38.jpg]
Chinese workers at a textile factory in Huaibei.
China’s slowdown, at first blush, is a major setback for the world. China accounts for 15 per cent of world economic output and has contributed as much as half of the world’s growth in recent years.
But that overstates its impact on other countries. China exports more than it imports, so a slowdown in its growth has a limited impact on its trading partners. Exports to China amount to less than 1 per cent of GDP for the US, UK, France, Italy and Spain, 2.6 per cent for Germany and 2.7 per cent for Japan, notes Peter Berezin of BCA Research, a financial-analysis service.
The exception is countries that sell raw materials. As China’s economy has decelerated, prices have tumbled for commodities. Oil also is being hit by surging supply from Saudi Arabia and, before long, Iran. This is a potential windfall for consumers in oil-importing countries such as the US and in Europe. But it is a big setback for commodity exporters such as Brazil and Russia.
That problem has been compounded by China’s decision this month to devalue its currency, the yuan.
While the Chinese central bank described it as a move to align the currency peg with market fundamentals, it also will make Chinese exports cheaper and expand their market share at the expense of other countries such as South Korea and Vietnam. Mr. Berezin predicts the move will be a net negative for the world.
While the short-term outlook for the US and most of the rich world is still relatively benign, it also is fragile. One reason: Long-term underlying growth is being undermined by an ageing population, slowing growth of the workforce and a puzzling slump in the growth of productivity — how much output each worker produces.
The International Monetary Fund estimates the long-term growth rate in rich countries will average just 1.6 per cent annually from 2015 to 2020, compared with 2.2 per cent from 2001 to 2007. Emerging-country growth will drop to 5.2 per cent between 2015 and 2020, from 6.7 per cent in the earlier period.
When long-term growth is slower, it takes less of a shock to push a country into recession. Japan’s economy contracted in the second quarter, and Citigroup noted private consumption there is lower than four years ago, in part due to an ageing population.
A second reason the rich world’s outlook is fragile is that inflation is stubbornly stuck below the 2 per cent level that the Fed, ECB and Bank of Japan all target.
The recent slump in oil prices and China’s devaluation, which will push down prices of everything that it sells, will nudge inflation even lower. When inflation is low, so are interest rates, which gives central banks less ammunition to bolster growth. That lack of ammunition worries policy makers, and it should worry investors who have often assumed central banks would help put an end to bear markets.
Until the last week, the Federal Reserve seemed cheered enough by the steady improvement in the US job market that it would start to raise interest rates in September.
Minutes to its July meeting, released last Wednesday, disclose no consensus for such a move last month, and shifting market conditions since then could convince Fed officials to delay.
To be sure, a single quarter-point rate hike isn’t going to derail the US economy. But in a world of low inflation and tepid underlying growth, even a modest increase in rates could pose headwinds.
The Wall Street Journal
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Wall Street slides as part of global rout
- DOW JONES
- AUGUST 22, 2015 10:24AM
Both the blue-chip index and the S & P 500 posted their biggest one-day percentage drops since November 2011. Source: AP
WN: Winners & Losers, August 21
[b]A global market rout intensified, pummelling stocks and commodities, as concerns about China’s economy pushed the Dow industrials into correction territory.[/b]
Both the blue-chip index and the S & P 500 posted their biggest one-day percentage drops since November 2011, with the Dow closing 10 per cent below its recent high. US oil prices also briefly dropped below $US40 ($A54.53) a barrel, a level not seen since the financial crisis.
Signs of a sharp slowdown in the world’s second-largest economy have unnerved investors since Beijing surprised markets last week by devaluing its currency. Shares in the US, Asia and Europe have tumbled, along with commodity prices as investors fretted about waning Chinese demand just as supplies are surging.
The Dow Jones Industrial Average declined 531 points, or 3.1 per cent, to close 16459.75. The S & P 500 dropped about 3.2 per cent to 1970.89. The Nasdaq Composite shed 3.5 per cent to 4706.04.
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The last time the S & P 500 and Dow were in correction territory was April 29, 2011, to October 3, 2011, when they fell 19 per cent and 17 per cent, respectively.
The market turmoil has some traders exercising caution.
“You have a situation that’s tough to play,” said Christopher Cady, a New York-based trader. He said he closed out bets toward the end of the week that US stocks would fall. “Nimble ... is the new black.”
The pan-European Stoxx Europe 600 ended the session 3.3 per cent lower, closing out its biggest week of losses since August 2011. The index has now lost nearly 13 per cent since its April peak, entering correction territory.
Earlier, the Shanghai Composite Index tumbled 4.3 per cent, hitting its lowest level since March, despite Beijing’s efforts to prop up the market in recent weeks. In Japan, the Nikkei fell 3 per cent to a six-week low.
An early gauge of China’s factory activity fell to a six-and-a-half year low in August, heaping further pressure on stocks and commodities after Thursday’s global sell-off.
“Now we’ve had some harder evidence that China is slowing relatively fast, people have chosen to get out,” said Kiran Ganesh, a multi-asset strategist at UBS Wealth Management, which oversees around $US2 trillion of assets.
A surge in investor demand for assets considered safest during times of market stress sent the yield on 10-year US Treasury bonds to 2.042 per cent, its lowest level since April. Yields fall as bond prices rise.
The US dollar fell by around 1 per cent against the euro and Japan’s yen. The euro and yen have recently tended to rise during times of market stress.
Some investors and analysts say they think the tumult in the markets could complicate the Federal Reserve’s plans to raise interest rates.
“The Chinese have created an air of fragility around the globe. Markets will now surely have to firm up considerably for the Fed to pull the trigger next month,” said Deutsche Bank analyst Jim Reid.
Ultralow interest rates have fuelled a big rally in stock markets since the financial crisis. On Wednesday, minutes of the Fed’s latest policy meeting showed officials were divided over when to raise rates, with some citing concerns over China’s economy as a reason to hold back.
But a delay in lifting rates may bring little comfort to investors if slowing global growth is underpinning the Fed’s caution.
Paul O’Connor, a senior fund manager at Henderson Global Investors, which manages £82 billion ($A175.2bn) in assets, said he has been selling stocks and buying bonds in recent months, fearing further spillover from the recent Chinese sell-off.
“Is there a buying opportunity in stuff that has got beaten up, or will it start to erode confidence in developed market assets? We’re in the latter camp,” he said.
Global equities suffered $US8.3bn of outflows in the week ended Thursday, representing the worst week in almost four months, according to data from Bank of America Merrill Lynch published Friday. Losses were particularly heavy in the emerging markets and the US
The recent rout in commodity markets continued Friday as fears over waning Chinese demand intensified.
Oil prices extended their recent declines. Brent crude oil, the global benchmark, fell 2.5 per cent to around $US45.48 a barrel, its lowest level since January. The US benchmark settled down 2.1 per cent at $US40.45 a barrel.
Industrial metals prices also fell as the Chinese data reignited worries about the future pace of demand from the world’s top consumer.
The London Metal Exchange’s three-month copper contract was down 1.2 per cent at $US5,057 a metric ton in afternoon European trade. Earlier it fell to as low as $US4,992.50 a tonne, just $US16 above Wednesday’s six-year low.
“Commodity markets are telling us this is quite serious,” said Neil Dwane, head of European equities at Allianz Global Investors, which oversees €412bn ($A626.7bn) of assets.
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Told you guys liao... whole world is bankrupt... no where to hide... financial mkt is forcing the hands of global policy makers...
Fears grow that central banks have run out of ammunition to fire at markets
DateAugust 23, 2015 - 7:58PM
[Image: 1435478719294.png]
Karen Maley
Columnist
The sell-off in global markets looks set to continue this week as investors worry that the world's major central banks have run out of ammunition to fight a looming global recession.
Eight years since the start of the financial crisis, global economic growth remains weak and elusive, with Europe and Japan seemingly mired in long-term stagnation, while the US economic recovery is fragile.
At the same time, investors have also become increasingly concerned that China's powerful manufacturing sector is contracting sharply, after a key purchasing managers' index dropped to a six-and-a-half-year low in August.
This has only heightened anxiety about the world's second-largest economy – which for the past decade has accounted for more than a third of global growth.
Of course, no one expected that China would continue to enjoy its frenetic expansion indefinitely. And Beijing appeared willing to accept slower growth rates as the country transitioned away from its old export and investment-led growth model.
But even though Beijing lowered its official target for Chinese growth this year to "around 7 per cent", few believe his will be achieved. The 8 per cent plunge in exports in July suggests that China is losing its competitiveness in global markets, while the fall in imports highlights the weakness of domestic demand. At the same time, the drop in producer prices to a near-six-year low in July – the 40th straight month of price falls – underscores the extent of overcapacity that exists in many key sectors.
As a result, many analysts estimate the Chinese economy is likely to expand about 3 per cent this year – or less than half of Beijing's target.
China's slowdown has huge ramifications for other emerging nations.
China is the major trading partner of many Asian and Latin American countries, and one of the world's biggest consumers of commodities, representing about 50 per cent of global demand for coal and nickel and more than 40 per cent for copper and zinc.
Weakening Chinese demand has created huge problems for big commodity-producing countries, such as Chile, Brazil, Russia, and South Africa, which have seen their export earnings dwindle and their currencies slump. When oil exporter Kazakhstan decided to let its currency, the tenge, float last week, it quickly lost 25 per cent of its value.
Emerging markets are feeling an additional strain as foreign investors, unnerved by the steep currency slides, rush to cut their exposure. Last week,emerging-market bond funds suffered their heaviest withdrawals since January 2014, with investors pulling out $US2.5 billion.
This exodus of funds represents a stark reversal of the pattern of the past few years. Emerging-market bonds have grown in popularity since the financial crisis, in which the world's major central banks slashed their key interest rates to almost zero. Faced with the depressingly low returns on offer in their own bond markets, United States and European investors poured trillions of dollars into funds that invested in higher-yielding emerging-market bonds.
Countries such as Brazil, China, Malaysia, Russia and Turkey were happy to satisfy this demand for appetite for yield. Together they've sold more than $US2 trillion ($2.7 trillion) in bonds, since 2009, mostly to US bond funds. Most of the money raised was invested in opening new mines or building new office towers, which helped boost the growth rates of emerging economies.
Now the reverse is happening, as investors take the view that the relatively high interest rates on offer in the emerging markets no longer compensate them for the risks they're running, particularly as the growth prospects of the emerging countries are dimming.
The problem is that many of these emerging-market bonds are hard to sell, particularly in a bear market. If investors rush to withdraw their funds, emerging-market bond funds may be forced to dump their investments, pushing down the prices of emerging market bonds, while yields move sharply higher. And higher borrowing costs will act as a further drag on economic activity in emerging markets.
So what's likely to stop this vicious cycle of commodity price falls and capital outflows from triggering a full-blown emerging-markets crisis that leads to a global recession?
One possibility is more stimulus from China that would, at least temporarily, boost demand for commodities and emerging-market bonds.
But investors' confidence in Beijing's ability to steer the economy has been shaken by the surprise devaluation of the yuan and the wild swings in the Chinese sharemarket. These two developments suggest China's leadership is divided on how to respond to the economy's problems, especially now that stimulus measures are becoming less effective in boosting growth.
What's more, with interest rates already near zero in the US, Europe, Japan and Britain, central banks in those countries no longer have the option of cutting interest rates to boost growth.
As a result, they are likely to either restart or expand their bond-buying programs, even though they have so far failed to kindle either economic growth or productive investment.
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Global market meltdown has been years in the making
- BUSINESS SPECTATOR
- AUGUST 25, 2015 12:18PM
Stephen Bartholomeusz
[Image: stephen_bartholomeusz.png]
Business Spectator Columnist
Melbourne
[b]The surprising aspect of the global rout occurring in financial markets is that it appears to have taken most people by surprise. It shouldn’t have because it has been literally years in the making.[/b]
There is an open question as to whether the sell-off continues and becomes the kind of crash that seems to occur once every decade or so, but there has been a sense of inevitability about a major re-pricing of assets and risk for quite some time.
Take a look around the world. Japan is still stuck in its decades-long economic winter, despite its continuing unconventional monetary policies. Europe, which is also pursuing its own version of quantitative easing, continues to stagnate. China is struggling to maintain growth as it tries to shift the structure of its economy towards more sustainable settings, and the US is producing modest rather than robust growth.
There was no good reason before the sell-off started for global investors to be bullish or to assign low premia to risks, but they were and they did because in the post-financial-crisis global environment of ultra-low (even negative) official interest rates there was a global hunt for yield and returns regardless of risk.
For much of the post-crisis period, that hunt has pushed funds -- mainly US dollars -- towards emerging markets but more particularly towards anything that provided an exposure to China and the seven per cent-plus GDP growth rates it has produced, partly because of its own massive stimulatory response to the crisis.
This year was always going to create some tests for investors, with the ending of the US’ QE programs last October and the moment of the first increase in US official interest rates drawing closer.
That moment when US monetary policy started to diverge from the other big economies had been widely foreshadowed by the US Federal Reserve to occur next month, although the upheaval in markets may now give the US central bankers pause for thought. The US dollar had already been strengthening, and risk currencies and their markets softening, in anticipation of the Fed’s move.
It doesn’t take much to start markets panicking, particularly when they have been pushed into bubble territory.
In this case the meltdown in China’s stockmarkets, which provoked some bizarre interventions from the Chinese authorities, and China’s decision to effectively allow a modest (and quite justifiable) depreciation in the yuan against the US dollar have provided the triggers.
It has become obvious that China’s growth rate is slowing markedly -- that the authorities are struggling to manage the desired shift in economic activity from exports and investment to consumption and that there is some fragility within China’s financial system that concerns them.
A question mark over China means a question mark over most of the emerging market economies or resource-producing economies like Australia, Brazil and Canada.
In that global search for positive returns, trillions of US dollars have flowed into emerging market bonds and stocks -- some of it highly-leveraged hedge fund carry trade activity.
The rising US dollar will swell the repayment obligations of those that have borrowed in US dollars, crimping economic growth further even as the Chinese engine of Asian growth is spluttering.
More significant, however, is that the sudden injection of fear into global markets has precipitated a significant re-balancing of the risk and reward equations, reversing the direction of capital flows that have generally been predicated on borrowing in the low to no-cost developed world to invest in exposures to the emerging economies.
The events of the past couple of weeks will test the resilience of a financial system that has changed since the financial crisis as layers of regulation have been introduced to the regulated sections of the system.
The IMF, for one, believes that the changes, which broadly restrict the involvement of banks in markets, will amplify market risk and movements.
There is a question mark over the supply of liquidity to markets under pressure. The shift of activities once undertaken by banks into the shadow banking system raises the potential that the larger role for non-banks, whose performance is generally assessed against market benchmarks, could be forced into a pro-cyclical rush for the market exits, exacerbating the volatility in markets and amplifying the movements.
Banking systems might be safer, given that banks hold more capital and more and higher quality liquidity and are constrained from principal activity, but the decisions of those who now have the capacity to move markets might be far more correlated than they were in the past.
Having embarked on unconventional monetary policies and sustained them through the post-crisis period, developed world central bankers and their overly-indebted governments don’t have much capacity to respond if the current sell-off in markets turns out to be something more destabilising and threatening than a major correction.
Federal Reserve members and others have consistently warned since the US embarked on its experimental monetary policies and others emulated it and turned global monetary policy settings into a currency war, that there could be unintended and potentially quite unpleasant consequences.
If the global sell-off were to continue and gather pace, we might get a better understanding of what those consequences might be. It would be most unlikely to be a positive experience.
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