PRECIOUS-Gold eases, awaiting fresh clues on US rate rise

31 Aug 2015 | Author: | No comments yet »

Asian stocks set for worst monthly drop in three years.

A gauge of global equities extended the biggest monthly slump in more than three years as sentiment toward China soured while Federal Reserve officials signalled they’re prepared to raise interest rates.

Although the exact timing remains uncertain, at some point over coming months the monetary policies of the world’s leading central banks will almost certainly diverge further, as the U.S.Global financial markets looked set for another rough week on Monday, with stocks and commodities falling ahead of data that could give clues on when the US will raise interest rates and surveys which are likely to point to further weakness in China. Federal Reserve and the Bank of England tighten, while the European Central Bank, the Bank of Japan and the People’s Bank of China continue to ease. Confusion over policy direction in the world’s two largest economies sent global markets into turmoil early last week, with the wildest price swings in years pushing investors to the exits.

One consequence of that divergence is likely to be changes in the exchange rates of the major currencies, although some of that adjustment may have already taken place in anticipation of the change. The US Federal Reserve left open the possibility of a September rate rise at a central banking conference at Jackson Hole, Wyoming, this weekend, though several officials indicated that prolonged financial market turmoil might delay such a move. The UK market is closed for a public holiday. “This is a market that is walking on glass; China seems to be the central theme feeding into a lot of these things but today the focus is very much on US interest rates again,” said, James McGlew, executive director of corporate stock broking at Argonaut in Australia. More than US$5 trillion has been erased from the value of shares worldwide this month as China’s surprise devaluation of the yuan on Aug. 11 sparked concern the world’s second-biggest economy may be in worse shape than analysts had estimated. MSCI’s broadest index of Asia-Pacific shares outside Japan shed more than 1 per cent and is set to fall 10 per cent this month, its worst monthly drop since May 2012.

Bets on a September Fed rate increase climbed after Vice Chairman Stanley Fischer said over the weekend there is “good reason” to believe inflation will accelerate. “The markets are still digesting the China news and it seems that the uncertainty from China’s rollercoaster is not over yet,” said Guillermo Hernandez Sampere, who helps manage the equivalent of US$167 million as head of trading at MPPM EK in Eppstein, Germany. “Any panic created out of this high volatility keeps investors out of the market. Gold is still on track to end August higher after worries over a slowing Chinese economy sparked a wave of short-covering earlier this month following the metal’s slide to five-and-a-half-year lows in July. “Neither current concerns about China nor a potential postponement of the first interest rate hike in the US should significantly revive investment demand for gold,” Julius Baer said in a note. That’s primarily because sharp appreciations in the dollar and the pound would put downward pressure on already low inflation rates as the prices of imports fall. They have plunged more than 40 per cent since mid-June. “A pull back in the market was to be expected as some investors are taking profits after the two-day rally,” wrote Gerry Alfonso, director of Shenwan Hongyuan Securities, referring to a brief rebound late last week. New research by economists at the International Monetary Fund and the World Bank shows that currency moves have a more muted impact on trade flows than they used to.

A weaker currency is therefore a double-edged sword: it may cut the cost of your product for an overseas buyer, but it increases the cost to you of making the thing in the first place. Investors sold $5.9 billion of emerging market assets between Aug. 20-26, a sharp increase from $1.5 billion the week earlier, according to Nomura fund flows data.

Stocks fell even as people familiar with the matter said China’s securities regulator asked brokerages to step up their support for share prices by contributing 100 billion yuan (US$15.7 billion) to the nation’s market rescue fund and increasing stock buybacks. Indeed ECB Vice President Vitor Constancio, speaking Saturday on a panel at the Fed conference, said the central bank had seen limited pass through from a weaker euro into inflation in Europe.

He added that the main point of the ECB’s stimulus policies was not to weaken the euro but instad to juice financial conditions through stocks and long-term interest rates. US crude was down 1.3 per cent at $44.62 a barrel after jumping more than 6 per cent on Friday on frenetic short-covering fuelled by violence in Yemen, a storm in the Gulf of Mexico and refinery outages.

Malaysia’s ringgit was the worst performer, losing 8.7 per cent in the month as a political scandal sapped investor confidence and a plunge in commodities prices dimmed the outlook for Malaysian shipments. When the volume or price of exports suffer, as they have for many emerging economies since commodity prices began falling a few years ago, depreciating exchange rates soften the impact on the domestic economy. Several have actually cut rates.” Greg Ip asks what we have learned over the past two weeks. “First: The U.S. economy is fine, emerging markets are not, and the rest of the world is somewhere in between. Yet stock market corrections of 10% or more are, traditionally, routine.” Two years after the taper tantrum, last week was the week of the Chimerican chill, historian Niall Ferguson writes in the Journal, referencing the symbiotic relationship between China and the U.S. that’s increasingly dominating the world economy. For the first time in financial history, a sneeze in Shanghai gave Wall Street — and almost every other stock market in the world — a cold, he says. “Get ready for more quantitative easing, but this time with Chinese characteristics,” he writes.

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