Stocks start week in red on Fed uncertainty, China fears

31 Aug 2015 | Author: | No comments yet »

Bond Market Anxieties Divide Wall Street on Fed’s Next Move.

U.S stocks tumbled in early morning trading Monday as uncertainty about the timing of Federal Reserve rate hikes and persistent fears about a China slowdown continue to weigh on financial markets after last week’s wild ride. 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.Dominic Konstam isn’t sure about Deutsche Bank AG’s forecast that the Federal Reserve will raise interest rates in September — and he works there. The major indexes are set to close out a volatile August with losses as the S&P 500 heads into the final trading day of the month down about 5.5%, putting it on track for its worst monthly performance since May 2012, according to S&P Dow Jones Indices.

Federal Reserve and the Bank of England tighten, while the European Central Bank, the Bank of Japan 8301 0.00 % and the People’s Bank of China continue to ease. In private and in public at last week’s global central banking conference in Jackson Hole, the message from visiting policymakers was that the Fed has telegraphed an initial monetary tightening and, following a year-long rise in the dollar, financial markets globally are as ready as they can be. 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 powerful group gathered at the end of a roller-coaster week in markets in which the Dow tanked by 1 000 points on Monday on concerns of a slowdown in China but recovered to trade higher by the end of the week. Despite the stock market’s rebound from big losses last Monday and Tuesday and its ability to close higher last week, the general tone of Wall Street reports released heading into the new week is that the turbulent period for stocks may not yet be over. “It’s too soon to give the ‘all-clear’ to buy without a … multi-week period of stabilization,” Oppenheimer’s Ari Wald told clients in a note before the opening bell. The split highlights the widening gap between those who take their cues from the bond market to gauge the prospects for U.S. growth and those who focus on economic indicators.

But for Agustin Carstens, the top central banker in Mexico, a rate hike by his neighbor sends an encouraging sign of economic health, even if it does force growth-challenged Mexico to also raise rates within days. “If the Fed tightens, it will be due to the fact that they have a perception that inflation is drifting up, but more important that unemployment is falling and the economy is recovering,” Carstens told Reuters in an interview. With China’s stock meltdown convulsing markets worldwide and commodities stuck near the lowest levels this century, bond traders pared back their inflation expectations as worries about a global slowdown deepen. That message conflicted with New York Federal Reserve president William Dudley’s comments last Wednesday which said the case for a September rate hike has become “less compelling” following the recent market turbulence sparked by worries about China’s economy. “Interest rate hike speculation will likely remain in the limelight, as the mid-September Fed meeting comes into focus,” said Gina Martin Adams, equity strategist at Wells Fargo Securities. 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.

Three-quarters of those surveyed by Bloomberg in August say the Fed will lift the upper bound of its target rate to 0.5 percent at its Sept. 16-17 meeting. After more than three decades of globalization, and the construction of global supply chains that involve even the smallest businesses, most exports contain lots of imported goods and services. While the survey was taken before markets went haywire, it was backed by data on Thursday, which showed the U.S. economy expanded more last quarter than previously reported. In Switzerland, the central bank has been forced to keep rates negative since it removed its cap on the franc at 1.20 to the euro, sending the currency soaring and putting a major strain on the export-dependent Swiss economy. “Latin America has seen a surge of inflation” as countries “internalize” the evolution of Fed policy, Central Bank of Chile Governor Rodrigo Vergara told the conference. 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.

Well before last week’s upheaval, which was triggered in part by China’s surprise devaluation of its currency, traders were signaling that the U.S. was having an increasingly tough time generating the type of growth to spur inflation. He added that the main point of the ECB’s stimulus policies was not to weaken the euro but instead to juice financial conditions through stocks and long-term interest rates. Those expectations, which are based on the premium that bond buyers demand to own Treasuries over inflation-protected securities, fell as low as 1.44 percent last week.

It also suggests that Fed officials may need to re-think their view that the effects of the commodities slump on inflation in the U.S. are transitory. Fed Vice Chairman Stanley Fischer said “it’s early to tell” whether recent market swings would change the likelihood of a rate increase next month, while New York Fed President William Dudley said on Aug. 26 that the turmoil made a September increase “less compelling.” Those shocks have already swayed strategists at JPMorgan Chase & Co., even as the bank’s economists stick to their forecast for rates to rise next month.

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