The US central bank’s “unorthodox” monetary policy played a vital role in stabilising global financial markets during the crisis, and in nurturing a fragile economic recovery since then. It now looks like something quite worrying indeed. The nervousness has radiated outward from China.
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Tokyo’s Nikkei 225 earlier closed down 4 percent after sliding 4.6 percent Monday.
Monthly movements in the S&P 500 index from February 2009. Germany’s DAX has now lost all the gains it made in 2015. The euro fell to $1.1461 from the previous session’s $1.1591 Oil rebounded from Monday’s steep declines. However, few are likely to have taken such an explanation at face value. We are going to stay invested and keep the asset allocation exactly as it is for now and for the investor with a nerve, this will be reflected upon as great buying opportunity.
Missteps along the way, including allegations it is wasting its reserves on fruitless attempts to support the stock market, also raised doubts over its economic stewardship. The first is the easier to answer; the sea of red is down to China and the Fed.
The risk of capital outflows and tighter liquidity after China devalued its currency on August 11th, weaker-than-forecast economic readings, and a 22 per cent stock market plunge over four days added pressure for more stimulus.
More impressive than the size of China’s economy is the speed with which it has grown, it said.
As for Japan, Europe and the USA, the sources of the issues within the 2008 disaster – the banks – have gone via rigorous reforms and recapitalization that depart them much more in a position to deal with upheavals. Even in June 2015, the Chinese exports went up by only 2.8 percent, in comparison to a year earlier.
“The ideal situation would be several years of a steady bull market to cover the restructuring phase”, wrote a Societe Generale analyst in a note last month.
“Significant interest-rate and reserve-ratio cut in China would be enough to soothe current jitters and head off the threat to Chinese and global growth”, he said.
The carnage was even worse in emerging economies, spurring comparisons to the 1997 financial crisis, which left East and Southeast Asian economies in tatters and some seeking bailouts from the global Monetary Fund. Many of these Asian economies today have considerable foreign-exchange reserves and stronger banking systems in place. Neither does a 2008-style meltdown appear to be on the cards. The one seems to be slowing much more quickly than the other can grow.
China’s economy is slowing down and it’s not clear what the country’s leaders can do to help it expand at a rate to generate enough new jobs and wealth to improve the lot of its enormous population. The government’s ability to manage market gyrations and animal spirits is very much in question, suggesting that a descent into Japanese-style stagnation is a possibility.
Clearly, the Chinese authorities’ efforts to put a floor under their stock market haven’t worked.
Follow our live coverage of global markets. The central bank has said there was no reason for the currency to fall further, but investors are also bracing for further interest rate cuts. That hangover may not take the form of a broad financial crisis.
Leading economist Saul Eslake says while we need to pay close attention to developments in China and our other trading partners, panic is not in order. That is a worrying prospect. America’s is more robust. In 2014, services accounted for 48% of GDP, compared with 42% for manufacturing and construction combined.
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Perhaps more importantly, rich-world governments have exceptionally little wiggle-room to act to boost up their economies. Meanwhile, as interest rates rise, the corporate margin debt and share buybacks that have been fueling the market buzz will end, too. Economists are already debating whether the Fed will delay raising interest rates or if the European Central Bank will bolster its quantitative easing program. The Fed is unable to repeat that feat now, and swooning markets are at least in part a reflection of that fact. “I’d probably be more sanguine than the market is today on that dimension…”
