Asian stocks set for worst monthly drop in three years on global rout

31 Aug 2015 | Author: | No comments yet »

5 things to know before the Singapore market trades this week: Aug 31-Sept 6.

A volatile ride for global markets this week ended calmly on Friday even as lingering worries over Chinese economic growth and the Federal Reserve’s plans to raise interest rates weighed on stocks, but oil rebounded sharply for a second day. A rate hike by the US central bank would likely lead to a stronger dollar, and entice global investors to park more of their money in the United States instead of emerging markets. Investors will be approaching markets cautiously on Monday (Aug 31) after last week’s dizzying ride with the big question still left open: Is the worst of the sell-off over? Recent turmoil in the global markets, spurred—perhaps—by weakness in China, has led many to believe the Fed will not raise its benchmark interest rate next month.

But after confirming a move into correction territory, US stocks rebounded last week to score their best two-day percentage gain in over six years after Federal Reserve Bank of New York President William Dudley said last Wednesday that the likelihood of a Fed rate rise in September had dimmed. The Fed is waiting to see how data and markets unfold over the coming weeks before deciding whether to raise rates at its meeting in mid-September, Vice Chair Stanley Fischer told CNBC.

Yet as Washington bickered, obfuscated and delayed, Beijing decisively injected $586 billion into China’s economy, ultimately turning the country into an engine of global growth. The move was the latest response by Chinese authorities, including the People’s Bank of China, to shore up the economy after they cut rates, lowered reserve requirements and injected liquidity into the banking system. Fed chair Janet Yellen, when talking interest-rate hikes, usually focuses on the domestic labor market rather than the fate of distant economies as an influencing factor.

Observers commended its distinctive political model — a hybrid of authoritarian politics and market economics — for giving its leaders the strength and confidence to weather the global financial storm. Stocks on Wall Street mostly edged higher at the close, as European equity markets did hours earlier, suggesting fears of Chinese contagion were overdone and that a US rate hike is not the end of the world, said Andrew Wilkinson, chief market strategist at Interactive Brokers LLC in Greenwich, Connecticut. “There’s an element of throwing the baby out with the bath water.

Everything got thrown out on that view,” Wilkinson said. “It’s really a question of volatility having settled down somewhat even though it remains relatively high and people still view equities as being a decent place to be.” The Dow Jones industrial average closed down 11.76 points, or 0.07 per cent, to 16,643.01. In Indonesia, for instance, an economist recently warned that if the currency weakens to 16,000 against the US dollar, it would bankrupt one insurance company and threaten the collapse of three banks, based on stress-test simulations. Before the biggie – Friday’s US jobs report – there are car sales, construction spending, the Fed’s “beige book”, trade figures and ISM manufacturing data to sieve through. China’s stock market is in chaos, losing more than 40 percent of its value since peaking in June; last Monday and Tuesday, the Shanghai composite plummeted about 16 percent. The rupiah is currently at just over 14,000, compared to around 13,500 on Aug. 10, the day before China devalued the yuan to boost its sliding economy and make its exports cheaper.

After a stronger-than-expected revision to second quarter gross domestic product last Thursday (Aug 27) and solid durable goods figures on Friday (Aug 28), another run of strong data this week may show the US economy is strong enough to withstand the first rate hike in nearly a decade from the Federal Reserve, despite worries about a hard landing for China’s economy. But traders also are also mindful of the fact that the Chinese slowdown could hit US companies and their shares disproportionately in the second half of the year, with luxury goods companies and industrials among the groups paying a price. The question now is will Indonesia face a triple-whammy: a weaker China buying less of its commodities, a lower yuan making China’s exports harder to compete against, and a higher US interest rate making the dollar stronger (and the rupiah by comparison weaker). Thomson Reuters data shows third-quarter earnings expectations have dropped 6.4 per cent for the US industrial sector and 8.8 per cent for the US materials sector since July 1. In January, Premier Li Keqiang said the country would have to “comprehensively deepen reforms” and “let the market play a decisive role in resource allocation to foster a new engine of growth.” China’s GDP is on track to expand perhaps 7 percent in 2015, its slowest rate in decades.

Traders said China’s government resumed its intervention in the stock market last Thursday and has been cutting holdings of US Treasuries this month to support the yuan, ahead of a high-profile parade this week. German bond yields edged lower, defying the sudden surge in oil, as data showed consumer prices in Europe’s biggest economy had been weighed down by falling energy costs. At least one Fed official has hinted that China’s slowdown could impact the outcomes of the Fed’s September meeting. “International developments and financial market developments do have relevance, because they can impinge and affect the economic outlook,” said William Dudley, a voting member of the Fed Open Market Committee—the one that makes key decisions about interest rates.

The parade has been planned for months and will provide President Xi Jinping with his first opportunity to publicly present himself to the world as China’s commander-in-chief. They cut interest rates and lowered the required reserve ratio, making it easier for banks to lend and borrow money, but otherwise let the market steer itself. The European Central Bank is expected to keep a steady hand when it meets on Thursday, after data on Monday is likely to show there is still very little inflation in the currency bloc almost half a year since the ECB started pumping €60 billion (S$95 billion) a month of fresh cash into the economy.

There is a small but growing chance the ECB will extend its stimulus programme beyond the planned completion in September 2016, and if inflation data misses expectations that likelihood will increase. For investors, the country’s lead policymakers — once seen as a group of competent technocrats — have begun to look disorganized and disconcertingly opaque. If upcoming snap elections don’t produce different results than the June elections, foreign investors will hit the exits, several economists warned in a recent Al-Monitor report. “At a time when Turkey’s growth model is based on borrowing financed by foreigners, both the Fed interest hike and political uncertainties could create a terrible effect,” said Sebnem Kalemli-Ozcan, an economic professor at the University of Maryland. Yet several important Chinese economic indicators — electricity generation, railway freight traffic, new-home construction — have also fallen over the last year, spooking foreign investors. Turkey’s currency, which had an average value of 1.90 to the dollar in 2013, is now at 2.92 and likely to decline further, surpassing the three-lira threshold soon. “Never mind three, it could even be four to the dollar,” Mert Yildiz, a senior economist at Roubini Global Economics, told Al-Monitor.

Much hangs in the balance — as China has developed and its middle class has grown, the country has become the world’s largest consumer of copper, steel, aluminum, cellphones, rice, tobacco, meat, coal and a laundry list of other products and commodities. In recent decades, its seemingly unquenchable need for resources has propped up economies across Southeast Asia, Africa and Latin America — but its demand has been slackening as infrastructure projects slow down and exports fall. Factory activity shrank in July after two months of expansion, with a drop in new orders and production as well as a further decline in new export orders. China’s economic health has a direct effect on other countries: Australian, Brazilian and Argentine mining companies have been selling off assets in response to shrinking demand; U.S. producers of semiconductors, engines and timber have had to reassess their bottom lines.

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