Greece takes a rest whilst China takes over adding to the wall of worry.

Equity prices have not taken the news of the governments decision to devalue the Renminbi well.  The reason being that it once again raises questions about the strength of the Chinese economy. At the start of the year the government committed to 7% economic growth for 2015. Recent economic indicators, for example the weak import export data reported at the start of the week, continue to throw this figure into doubt. Merrill Lynch reported yesterday that China’s leading economic activity pulse fell to negative 3.9% year on year from a negative 2.6% in June. Freight volumes are down 11% on the year, leading to Fathom Consulting expressing the view that they believe the Chinese economic growth may be nearer to 3% than the 7% expected. Whatever the Chinese government report officially as to the GDP growth of the economy, most economists are likely to take the figure with a degree of skepticism.

 

Fathom go onto to suggest, according to John Authers in Thursday’s FT, that if the Chinese economy was to crash an orderly devaluation of the currency of about 25% could take place. Mr. Authers goes on to point out the risks of China losing control of the market could lead to the possibility of a disorderly rout of the currency, although he does believe the risks of this are small.

 

Reaction to the Chinese move may have caused volatility in the equity market but it has done little in terms of impact in the US bond market so far. US ten-year treasuries currently yield 2.2%, approximately where they have held steady after the sell off earlier in the year. Two-year yields currently stand at 0.7pct, again within its recent trading range.

 

Interest rate expectations have been that the US would move to raise rates in September for the first time in 7 years. The US dollar may have risen against the Renminbi but if anything it has lost a little ground against its wider basket of currencies in the past 5 days, which could suggest that currency markets are becoming less convinced. If the decision to move next month was in the balance one could argue it is evenly more finely balanced today. The probability of more stimulus measures from the Chinese central bank seems higher. One consequence of this weeks move is that interest rates around the globe are likely to stay close to where they are for some time to come. 

Posted on August 14, 2015 .