Talking Points
China is a key concern for developed world groups, but is particularly troubling for EM players
Some traders may not be fret market volatility, but central banks are paying attention
Low commodity prices may benefit consumers, but they weigh the economies of producers
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The outlook for the global economy and financial markets have soured significantly over the past months. With more frequent bouts of market volatility, a slowdown in GDP, worries of divergent monetary policy and unique China along with major Emerging Markets concerns among other factors; the list of threats to our future seems to be growing.
Below I highlight a few of the common concerns showing up across policy groups’ assessments. Most of these views are steeped in warning and trepidation. Though, there are some that treat current issues with a sense of optimism or expectation that they are temporary. Nevertheless, given the consistency of these issues across the world, they are certainly critical themes to keep close tabs on for projecting speculative appetite as well as monetary policy plans.
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Bearish | Pessimistic| Dovish
– Jan 6 -World Bank Report: “Simultaneous weakness in most major emerging markets is a concern for achieving the goals of poverty reduction and shared prosperity because those countries have been powerful contributors to global growth for the past decade. Spillovers from major emerging markets will constrain growth in developing countries and pose a threat to hard-won gains in raising people out of poverty, the report warns…Firmer growth ahead will depend on continued momentum in high income countries, the stabilization of commodity prices, and China’s gradual transition towards a more consumption and services-based growth model.”
– Jan 21 – European Central Bank President Mario Draghi Press Conference: “Yet, as we start the new year, downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks.”
– Jan 28 – Brazil Central Bank Minutes: “It should be noted also the increased uncertainty generated by low oil prices and their implications for sector companies and producing countries, as well as for financial markets in general, risks to global financial stability.”
– Jan 28 – South Africa Reserve Bank Statement: “Emerging market growth prospects, particularly for commodity-producing countries, remain constrained amid persistent capital outflows. The outlook is heavily influenced by the slowing Chinese economy but there are conflicting views as to whether a hard landing can be expected.”
– Jan 29 – Bank of Russia Statement: “The time period since the Bank of Russia Board meeting in December saw risks to price stability escalating. The stubborn glut of oil, the slowing Chinese economy, combined with the US Federal Reserve rate hike, have triggered a further drop in the price of crude. This, in its turn, caused the national currencies to weaken and asset prices to drop in emerging markets, affecting Russia. With more volatility in oil prices, the magnitude of variation in Russian financial asset prices and the ruble exchange rate fluctuation has increased.”
– Jan 29 – Bank of Japan Statement: “Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy. For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected. ”
– Feb 1 – Fed Vice Chairman Stanley Fischer: “In addition, increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets.”
– Feb 2 – Reserve Bank of Australia Statement: “Financial markets have once again exhibited heightened volatility recently, as participants grapple with uncertainty about the global economic outlook and diverging policy settings among the major jurisdictions. Appetite for risk has diminished somewhat and funding conditions for emerging market sovereigns and lesser-rated corporates have tightened.”
– Feb 2 – Reserve Bank of India Statement: “The December calm in global financial markets – suggesting that the normalisation of US monetary policy was fully anticipated – was dispelled in January 2016 by fears of further weakening of the Chinese economy and the depreciation of the Renminbi. Capital outflows from China triggered sell-offs across AEs and EMEs, exacerbating currency declines and heightening volatility. Crude oil prices fell below US $ 30 per barrel – a 12-year low –on expectations of Iran adding to the supply glut. Prices of gold prices and US Treasuries hardened on safe haven demand. Financial markets remain vulnerable to bouts of volatility and capital outflows from EMEs as an asset class. Bearish commodity price dynamics are also likely to impact investor sentiment.”
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Neutral
– Jan 26 – FOMC Rate Decision Policy Statement: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”
– Jan 28 – Fed 2016 Stress Test Statement: “For the 2016 cycle, the severely adverse scenario is characterized by a severe global recession in which the U.S. unemployment rate rises five percentage points to 10 percent, accompanied by a heightened period of corporate financial stress and negative yields for short-term U.S. Treasury securities.”
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Bullish | Optimistic | Hawkish
– Jan 11 – Dallas Fed President Steven Kaplan: “In addition, as we go through this period, I would not be surprised to see more bouts of volatility in the financial markets. The challenge for policymakers is to appropriately consider these movements, without over-reading or misinterpreting them, in assessing underlying economic conditions.”
– Jan 26 – Tim Cook CEO of Apple Conference Call: “Our results are particularly impressive, given the challenging global macroeconomic environment. We’re seeing extreme conditions, unlike anything we’ve experienced before just about everywhere we look. Major markets, including Brazil, Russia, Japan, Canada, Southeast Asia, Australia, Turkey and the eurozone, have been impacted by slowing economic growth, falling commodity prices and weakening currencies…Notwithstanding these record results, we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong. Beyond the short-term volatility, we remain very confident about the long-term potential of the China market and the large opportunities ahead of us and we are maintaining our investment plans.”
– Feb 2 – Kansas City Fed President Esther George: “To a great extent, the recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond-buying policies focused on boosting asset prices as a means of stimulating the real economy.”
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Source: Daily fx
