Yet more China worries sparked a sell-off in global equity markets. A gauge of Chinese manufacturing activity – the Caixin China Manufacturing Purchasing Managers’ Index – fell to a six year low. It suggests the Chinese factory sector is contracting which is not consistent with the 7% growth forecasts coming out of Beijing.
The Asian-Pacific markets took a drubbing this week. Japan’s Nikkei 225 lost 3.5%. Hong Kong’s Hang Seng Index lost 6.5% and is now down 22.3% since its April peak. Australia’s S&P/ASX 200 gave up 3.0%. China’s Shanghai Composite dropped 11.5% and is off 33.2% since mid-June.
The S&P 500 was down 3.2% on Friday to 1,971 and fell 5.7% for the week. It was the worst week since 2012. Total return year to date is now negative at -2.7%.
The Dow Jones Industrial Average lost 531 points on Friday closing at 16,460 – just over 10% below its recent high reached in May.
U.S. bonds rallied in price and yields fell 16 basis points over the week to 2.04% on the 10 year Treasury. Five year investment grade corporate CDX spreads widened out a dime and similar maturity HY bond spreads gapped out over 30 basis points.
Gold regained its luster as a safe haven asset and rallied to a four week high on economic uncertainty and equity market turmoil, closing at $1,160 on Friday.
Oil closed down to $40 bucks a barrel, its lowest price since March 2009. Bloomberg reported that “the U.S. pumped crude in July at the fastest monthly pace since 1920, according to the American Petroleum Institute.”
Of course all of this market volatility is very unsettling and bound to spark worries of another crisis, a la 2008/09. That is overblown. The financial system is much stronger than it was in 2008 and it is very unlikely that we are headed for a recession. Chinese policymakers have levers to pull. Eventually the “good news” of lower oil prices will kick in and help the economy. And of course much of the “bad news” is in the market now. There are headwinds for sure. It’s going to be bumpy. Still, it’s best to stay tied to your long term plan.
Some good news next week! Second quarter GDP in the U.S. could be revised up from 2.3% to 3.0% due to better retail sales and homebuilding data, according to Macroeconomic Advisors. And ISI believes that 225,000 new jobs were added to the economy in August and the unemployment rate fell to 5.2%.
CPI data out last Wednesday showed little signs of inflation, with the headline number at 0.2% YoY and the core (ex food and energy) at 1.8% YoY. The same is true overseas – weak inflation numbers throughout the world. That’s why bond yields are so low.
Dovish Tone Adds To Doubts On September Hike. That’s how ISI and others interpreted the minutes of the Fed’s July 28-29 meeting out this past Wednesday. A key line: “Most (officials) judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” It’s still a coin toss as to whether the Fed will raise rates at their September 16/17 FOMC policy meeting. A lot is riding on the August employment data and whether commodity prices stabilize.
The annual Jackson Hole meeting of central bankers is next week and it should be interesting! Yellen won’t be there for some reason.
I listened in on a conference call where China expert Steven Roach spoke. He was Morgan Stanley’s chief economist and is now a professor at Yale.
Roach thinks that the recent devaluation of the yuan was not just a technical change – allowing market forces to determine exchange rates, but rather real concern on the part of Chinese authorities over the state of the economy. Export growth is falling and consumer led growth isn’t taking off as hoped, even though services are 5% higher as a % of GDP vs. 2011. There are downside risks to China’s growth story. He is worried about currency wars in a slow global economy – noting it’s a zero sum game. Chinese authorities really value the “social stability” that comes from growth and employment and will work hard to keep growth going. The Yuan will likely depreciate gradually in a controlled fashion.
Looks like President Obama will be in town August 30/31 at the Arctic summit. It is going to be quite a traffic jam in downtown Anchorage. Best to avoid the place for a couple of days!
Nary a day under 100 degrees during my sojourn in Austin, Texas last week. It was nice returning to pleasant summer conditions here in Anchorage.
Jeff Pantages, CFA®
Chief Investment Officer