“Given what’s going on in China and the rest of the world, the US economy could grow a little more slowly”. “But it will not reverse the decline”, said Hong Hao, chief strategist at investment bank BOCOM International.
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Much of the week’s turmoil originated in China, where authorities on Friday moved to stabilize the currency, bought shares and suspended a circuit-breaker system that fueled days of global financial panic. There was mayhem on regional markets, and panic ensued on bourses in the West too.
Asian markets closed mixed on the last day of 2016’s first trading week, after a wild ride that saw the Chinese market shut down prematurely twice to stem rapid selloffs, oil prices falling to 12-year lows and the persistent volatility across the region.
“The circuit breaker is a magnifier, but not trigger, of market volatility”. Other Asian markets slumped as well. One big reason is the weakening yuan.
More than €2.1 trillion was wiped off global stocks this week as China’s slowing economy and currency depreciations spooked investors around the world, leading to the worst start to a year for markets in at least two decades.
So, what is it with the yuan? Analysts at Rabobank Group of the Netherlands are the most bearish, predicting the yuan will weaken to 7.6 per dollar by the end of December.
In an environment of rising USA borrowing costs, the window for emerging-market central banks to shore up growth with interest-rate cuts had narrowed even before the ructions in China. It is meant to be a guiding rate for the way in which it wants the yuan to trade. In August, it surprised investors by changing the way the yuan’s daily “fix”, or trading limit, is set.
ANALYST TAKE: “Today’s U.S. jobs report may be seen to carry less significance than in recent months, particularly given the drama surrounding Chinese markets this week, but with the rate hike cycle now underway, the data will only become increasingly significant as it will largely determine whether a faster pace of tightening is necessary, or the Fed has made a mistake in initiating the process”, said Craig Erlam, senior market analyst at OANDA.
Why was it then allowed to strengthen?
China nudged the yuan higher for the first time in nine days, easing fears that it had lost control of the currency. But it’s unlikely this problem will go away. The Chinese media itself shows a lot of concerns on how far the equity market can fall. Combined with a bearish outlook for stocks and capital outflows, however, our outlook on the yuan remains negative through the coming week.
Stocks in many markets around the globe, meanwhile, are still trading above their historical valuations, making shares vulnerable to any new market shock or souring of sentiment.
The Chinese have managed a remarkable achievement – for the last 30 years a state controlled and state planned economic miracle that’s seen incomes rise and wealth created on a historical scale.
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Instead of providing and engaging in further reforms of the currency, the authorities have embarked on a perilous path of trying to gradually weaken the currency to help make China’s exports relatively cheaper in foreign markets.
