There were two dogs that did not bark this year. The Japanese yen, which despite negative interest rates and an unprecedented expansion of the central bank’s balance sheet, strengthened 15% against the dollar. The yen has been the strongest major currency, and the third strongest currency in the world behind the high-yielding Brazilian real, recovering from last year’s drop, and the Russian rouble, aided by a rebound in oil.
The other dog that is not barking is China. In August 2015, and again at the start of is year, the decline of the yuan and weakness in Chinese equities reverberated around the world. It was even cited as a factor influencing the timing of the Fed removing accommodation. Since early this year, the yuan has continued to depreciate, and Chinese shares are among the worst performers. Yet it has not been a disruptive force.
The Shanghai Composite has fallen 11.5% this year. MSCI Emerging Market Index has gained about 14%. MSCI Asia-Pacific Index has advanced roughly 6% this year. MSCI’s World Index (developed markets) is about 4% higher on the year.
China’s reserves have fallen by about $134 bln in the first nine months of the year. This understates the capital outflow as China also recorded a $134 bln current account surplus in H1 16 and a trade surplus of $146 bln in Q3. Brad Sester of the Council on Foreign Relations, estimates that China may have experienced outflows of $95-$100 bln in Q3. As China sells reserves, it is selling US Treasuries. The latest country breakdown covers the month of August. US data, which is not necessarily comprehensive, estimates that China sold $33.7 bln of Treasury Securities in August after selling a combined $25.2 bln in June and July.
In addition to reporting on the dangers facing global banks as a result of declining profits in the current low rate environment, today the IMF also released its latest Fiscal Monitor report which sounded a loud alarm when it revealed something disturbing: at 225 percent of world GDP, the global debt of the nonfinancial sector, comprising the general government, households, and nonfinancial firms, is currently at an all-time high of $152 trillion.
Add financial debt and you will need a far bigger chart.
Rating agency Fitch has cut its US economic growth forecasts for this year, warning “downside risks to advanced country economic growth have risen in recent months”.
Fitch has cuts its 2016 US growth forecast to 1.4 per cent from the 1.8 per cent pace it predicted in July.
Brian Coulton, chief economist, said:
This year is likely to see the lowest annual growth rate for US GDP since 2009 as oil sector adjustments, weak external demand and the earlier appreciation of the dollar take their toll on industrial demand.
The report also highlights worrying trends in other key developed markets across the globe.
It says that eurozone growth likely peaked in early 2016, and there have been no improvements to the outlook for the UK and Japan “despite significant monetary policy moves”.
The outlook for the advanced countries is best described as a low-growth, muddle-through path.
The global economy is faltering again with growth rates “sliding back into the morass [they have] been stuck in for some time”, according to the Brookings Institution-Financial Times tracking index.
In a publication ahead of this week’s annual meetings of the International Monetary Fund and World Bank, the results will reinforce fears that many countries have become caught in a vicious circle of low growth, popular discontent and a backlash against trade and openness, resulting in more economic weakness.
The annual meetings will encourage policymakers to pursue inclusive and faster global growth as international organisations, finance ministers and central bank governors seek to reassure the public they can co-operate and that they have the necessary tools to break five years of economic disappointments.
Hanging over the meetings is the fear that the failure to improve living standards in advanced and emerging economies was important in the UK’s vote to leave the EU, may propel Donald Trump to the US presidency and will strengthen the hands of populists such as Marine Le Pen in France.
The sprint out of European equity funds has stretched to almost six months, draining portfolios of $76bn since the start of the year as uncertainty over the implications of the Brexit vote and a crisis in the Italian banking sector weigh on investors.
The past week saw more than $4bn pulled from portfolio managers invested in European stocks, a moderate deceleration from a week before when a record $6.2bn was yanked, according to fund flows tracked by EPFR, the Boston-based fund monitor.
Surveys of business confidence and activity in the manufacturing and retail sectors have weakened in the UK, as nerves fray over the long-term effects of the country’s exit from the EU. New data from market research company GfK on Friday showed British consumer sentiment suffered its sharpest monthly fall in July since 1990.
Investors have become wary of the prospect of further monetary policy easing as $13tn of bonds trade with a yield below zero. Fund managers say they are hoping for fiscal stimulus in the wake of the downbeat figures.
“There really is a fear and it is getting worse,” said Brad McMillan, chief investment officer of Commonwealth Financial Network. “US investors are getting less confident about the rest of the world. We are also seeing globally fixed income investors move into the US. It’s a rational move for them to chase yield.”
The World Bank is set to appoint Paul Romer, a longtime advocate of the economic power of human capital and student of urbanisation, as its new chief economist, bringing arguably the highest-profile name to the role since Nobel winner Joseph Stiglitz.
Mr Romer, a US economist who teaches at New York University, is expected to replace Kaushik Basu later this year. A spokesman for the bank would not confirm Mr Romer’s appointment but others within the institution did. His name is expected to be presented to the World Bank’s board as soon as Monday and announced publicly later in the week.
The move would put an important and occasionally provocative voice in economics in charge of the bank’s research department.
His 1990 paper arguing the case for “endogenous growth” — the theory that knowledge and innovation can spur growth — is considered one of the most influential papers in economics of the past 30 years.
“It’s an impressive choice,” said Scott Morris, a former US Treasury official who follows the World Bank for the Centre for Global Development. “It’s more in the [Larry] Summers and Stiglitz mold of picking an American superstar economist.”
Emerging market equities are on track for their biggest weekly rally in four months, while EM currencies and bonds are also advancing strongly as risk appetite rebounds following the post-Brexit vote plunge.
Although emerging market currencies and equities took a hit along with other global markets after the UK voted to leave the EU, they have bounced back faster and more strongly than other assets
The MSCI EM equities index has climbed 4.5 per cent so far this week, its biggest weekly gain since March.
Emerging market debt is back in vogue with investors.
With government bond yields in Europe and Japan continuing their relentless march lower and markets all but giving up on the possibility of an interest rate rise in the US this summer, investors are once again taking their hunt for yields to riskier emerging markets.
Borrowing costs for emerging market countries have fallen sharply over the past week, with the average yield on JPMorgan’s EMBI Global Diversified index, one of the benchmark gauges for the asset class, down 25 basis points since the start of June to 5.50 per cent on Wednesday — the lowest level since last May.
While that is still higher than the record low of 4.29 per cent reached at the height of the EM bond boom in 2013, current yields are down from the 6.39 per cent seen at the start of the year when markets were convulsed by plunging commodity prices and worries over China’s economic slowdown.
As Simon Quijano-Evans, chief EM strategist at Commerzbank, noted:
The brief reprieve in emerging markets is over, cancelled out by a sharp reminder from the US that nobody should be betting on low rates to last for ever.
As markets absorbed the US Federal Reserve’s April meeting minutes published last week and realised that a summer rate rise was back on the table, a “risk-off” trade took hold that pushed the dollar up and sent commodity and equity prices down.
Amid the sell-off, the fledgling rebound in emerging market currencies, stocks and bonds that surprised investors in March and April ground to a halt.
MSCI’s emerging market share index fell almost 3 per cent last week, taking the index negative for 2016. Major currencies including Russia’s rouble, South Africa’s rand and Turkey’s lira have weakened against the dollar and average EM country borrowing rates are at a month-high.
Investors profess themselves unsurprised. After years of underperformance, it will take more than a two-month rally to counter their misdoubts.
“The rally in March and April was only ever about short-covering,” says Bryan Carter, head of emerging market fixed income at BNP Paribas Investment Partners. “Investors were so pessimistic about a long period of bad headlines and weak data that they were severely underweight by the start of the year. All they did was go from underweight to neutral.”
Data from JPMorgan show that even this move was less than wholehearted. The share of emerging market equity exchange traded funds as a percentage of all equity ETFs remained low even in the midst of the rebound — at about 9 per cent of the total, from 20 per cent in 2013.
Google parent Alphabet briefly became the world’s most valuable publicly-traded company by market value on Thursday as the sell-off in Apple’s shares this year continued.
Apple’s shares dropped as much as 3 per cent on Thursday, extending the iPhone maker’s drop this year to 14.7 per cent, and bringing its market value down to $492.2bn.
The shares of Alphabet, meanwhile, were little changed, leaving the California-based company’s market value at $492.6bn.
The last time Alphabet’s market value topped Apple’s on a closing basis was on February 2, according to Bloomberg data. However, Apple had managed to regain its lead until Thursday.
Apple’s shares have been hit hard by worries that sales of the iPhone, its flagship product, may start to wane as consumers in developed markets find fewer reasons to upgrade their smartphones, and a slowdown in major emerging markets, like China, reduces demand.