Whew. Thursday and Friday of last week were something to behold in the
markets. The much anticipated correction just might have started in equities,
and the Forex space has not been exempted from the turmoil.
The proximate cause for the sell-off was a purchasing managers’ report
from China that came out in
the very early hours on Thursday morning (GMT), and which fell short of the average
of expectations of a group of economists that had been polled by one of the US news
channels. It also fell below the figure of 50, which indicates contraction
rather than growth. Now, PMI reports are important but they are, nevertheless,
an amalgam of the subjective opinions of individuals. At the start of the week,
on Monday, official Gross Domestic Product (GDP) figures for China also showed
a contraction, but because this particular contraction was smaller than the
“consensus” of a group of economists, the markets actually rose further on the
news.
This illustrates, if illustration were needed, the fickle and capricious
nature of the trading community. Commentators late last week had it that the evidence
on Thursday morning of the reduction in activity in the second largest economy
on the planet, when combined with the expected turning off of the cheap money
that has emanated from Quantitative Easing in the US, is enough to threaten equities
to the extent that the stock markets have to go into meltdown and emerging
market currencies must be devalued in a precipitate manner.
Except for one thing - all of this was already in the public domain. It
is well known that China
is in the process of adjusting its economy from one that relied on the export
of manufactured goods and government sponsored infrastructural projects to one
that can be supported, to a much greater extent, by domestic consumption, with
a corresponding reduction in growth rates. The announcement of the end of QE by
the Federal Reserve in the USA
was made before the Christmas and New Year holidays.
And be sure of one thing: None of this will impact in the slightest on
the resolve of the Federal Reserve to carry out tapering and, eventually, to increase
interest rates in line with steady improvement in the US real economy
which will be measured, in the first instance, by rises in employment.
Emerging markets and the Kiwi
While the New Zealand
dollar is heading in the right direction against the Aussie for our trading
strategy (Kiwi is strengthening), it is not doing so with anything like the
speed we would have expected. Remarks made by pundits late last week variously
suggested that it was being tarred with the “emerging market” currency brush,
or that it was suffering because it is a commodity currency.
Our Kiwi friends will not be happy about the emerging market allusion
and, while New Zealand exports a lot of its produce to China, this is in the
form of dairy products and other soft commodities, purchases of which can be
expected to actually rise both in the context of the Chinese transition to
internal consumption (see above) and the relaxation of the one-child policy,
which was announced by the Chinese government late last year. This last can be
expected to increase even further the demand for baby formula and other dry
milk powder products.
All in all, the turmoil in the markets in the final two days of last
week meant that our risk control and money management procedures were employed
to the fullest possible extent.
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