The angst kicked off with worries about the condition of the Chinese economy and the implications for the broader market shows no signs of abating as volatility across all asset classes continue to persist. Equity markets from Asia to Europe continue to swing wildly which has encouraged a flight of capital to safe haven bonds and currencies.
Starting off with the Asian session, Beijing’s move to temper angst with yesterday’s rate cut only temporarily boosted confidence as we have seen an absolute whipsaw in price action in the Shanghai composite today with the market initially down 3.8%, then recovering 4.3% only for yet another sell off to ensue which brought the index to a close 1.3% lower than the day before. The volatility in Shanghai is symptomatic of the type of instability gripping markets as the Nikkei saw a similar performance while ending the day higher and hopes that Chinese stimulus would drive increased demand allowed Australia’s ASX index to close .7% higher. As repeated attempts by policy makers in China to calm the tempest fail to restore confidence, capital continues to flow to safe haven assets with US dollar denominated assets being the chief beneficiary with the big dollar itself gaining on all of the majors including the Japanese yen, euro and pound sterling.
The story in European equities is much the same as in Asia, with the FTSE Eurofirst 300 index exhibiting the same two way volatility as the Shanghai index, while implied volatility in European shares hit a four year high. Compounding this is a decline in the value of the euro as recent comments made by Peter Praet, the ECB’s chief economist, reverberate. On the sidelines of a continuing conference, Praet indicated that even when considering the inflationary effects of the ECB’s quantitative easing there remains a risk that the Eurozone economy will miss its inflation target to the downside. This is driven in part by the fact that recent market volatility, especially in emerging markets, is not supportive of global economic growth. This commentary has the euro on the back foot versus the greenback while it has made some gains against a British pound that has languished despite a retail sales figure in the UK that beat expectations.
Prior to the market opening stateside, equity futures are in the green indicating that the despair besetting capital markets elsewhere in the world will not dampen expectations in North America. While we have seen a multiyear high spike in equity market implied volatility in North America as markets correct themselves, the single biggest worry concerns the impact these latest developments will have on Federal Reserve decision making. While the fed has been consistent with the message that we should expect a rate increase sometime in the second half of 2015 with that decision ultimately being data dependant. Market expectations that the rate increase will occur at the Fed’s meeting in September have sharply diminished as the implications of the spike in uncertainty on global growth have yet to be borne out. Today, we will have some insight into where the Fed sits with respect to recent market developments as FOMC member Dudley is expected to speak later this morning. In terms of the currency impact, the recent uncertainty has been supportive of a stronger USD, we also saw durable goods orders in the United States beat expectations in consideration of this and the crude oil inventory read coming in later today market participants need to be mindful of continued volatility in the dollar.
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