Sunday, August 23, 2015

Equities, commodities in the firing line | … but will market turmoil influence the Fed?

After a particularly poor reading on Chinese manufacturing (Caixin / Markit China Manufacturing Purchasing Managers’ Index (PMI)) on Thursday, the world’s stock markets accelerated their drive lower on Friday. European exchanges suffered on the last day of the week and were followed by the Dow Jones and by all other major indices around the world. Market open in London this AM is set to see further falls, perhaps dramatic ones.

Tracking the various commentators over the weekend, it is apparent that once again this kind of correction had taken equity investors by surprise. This should not be the case. Every market, everywhere, undergoes a correction from time to time, and coming to the end of the summer trading season has always been the time of year to expect something of this sort.

Yes, China has its issues, and China is major influence on the global economy. Yes, the price of commodities is falling.

But the Chinese are adept at doing whatever is necessary to protect their economic growth. For example, it has just been announced that the Chinese Central Bank is now ready to pump as much cash as is necessary into the country’s commercial banks in order to stimulate lending. As for commodities, such as oil, they do not contribute to core inflation data and so falls are to be welcomed as a means of providing more spending money to consumers. This, in turn, will assist all parts of the economy outside of the energy sector.

Will market turmoil influence the Fed?

A lot of the chatter in the wake of Friday’s equity plunge has been along the lines of “the Fed cannot raise rates as long as the equity markets are plunging”, or “Emerging market currencies are in free fall because of a fear of interest rate rises in the US”. But members of the Federal Reserve in the US have long been at pains to let everyone know that (1) they do not regard the equity market as a part of the real economy and (2) their considerations are exclusively about the domestic situation of the USA, and so the effects of their decisions on emerging markets are very far from the top of their priority list when it comes to decision making.

We may or may not have a rise in core US interest rates this year, but the effect of so doing on equities or on the fate of emerging market currencies will not be the major factors that are taken into account by the Fed policymakers.

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