Business

Global Market Chaos Amidst Worries About China, Etc.

Global Market Chaos Amidst Worries About China, Etc. by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

August 25, 2015

IN THIS ISSUE:

  1. Global Chaos Erupts, Worries About China, Fed, Etc.
  2. China’s Economy Shows More Signs of Weakening
  3. Note to Donald Trump: Get Your China Facts Straight
  4. Oil Plunges to New Lows – Adds to Global Uncertainty
  5. Meanwhile, Commodity Prices Continue to Slump
  6. Fed Rate Hike September 17, Or Will Yellen Blink Again?

Overview

There is so much to write about today it’s  hard to know where to start. Equity markets around the world are plunging on worries about China, a possible Fed interest rate hike next month, the worsening bear market in commodities, economic and currency weakness in emerging markets, etc., etc.

I will touch on each of these concerns today. Plus, I have a message for Donald Trump who needs to get his facts straight on China, among other things. Following that discussion, we’ll look at crude oil prices and other commodities which have fallen to new lows over the last week. And, of course, we will discuss the Fed’s next move in light of the latest carnage in the markets.

It should make for an interesting discussion, so let’s get started.

Global Chaos Erupts, Worries About China, Fed, Etc.

The US and global equity markets can only ignore so much bad news for so long. Inevitably, there is always a tipping point. I warned about this in April and May and advised readers to reduce long-only equity exposure significantly.

I was a little bit early, given that the Dow and the S&P 500 managed to hit new record highs in the second half of May. But it’s been all downhill since then, and the wheels really fell off last week. Stocks took their worst pounding in four years last week with the Dow Jones plunging by 530 points on Friday, reaching a 10% correction for the first time since October 2011.

The S&P 500 Index also fell sharply last week, blasting through key support levels to 1970, for a one week decline of 5.8%. As of the end of last week, the S&P 500 was 7.7% off its recent record high above 2130 in May.

The selling actually intensified yesterday when the Dow Jones opened over 1,000 points lower and the S&P 500 plunged to near 1,900 on the open – in response to another huge selloff in Chinese stocks. This selling is not likely to subside until there are some clear signals from both China and the Fed. While the US stock markets rallied strongly today, those gains were reversed late in the session to close lower on the day.

The Dow Jones Industrial Average has now plunged from around 18,200 in May to well below 16,000 by the close today – a decline of over 14%. The S&P 500 Index has a similar picture – a new all-time high in May above 2,130 only to plunge to below 1,900 at today’s close. And more carnage may yet lie ahead.

Global Market Chaos China

As I warned earlier this year, global markets have finally decided to worry about weakness in China and whether it will continue to spread into other emerging markets, hurting their currencies even more. Emerging market currencies have fallen sharply lower in recent weeks, hurt by falling commodity prices and fears of further currency devaluation by China just ahead.

Those markets have also been hit hard by the prospect of a rising dollar, which makes their dollar-denominated debt larger. However, the US dollar has moved lower since the beginning of August which should begin to bolster emerging market currencies if this new trend continues.

On the other hand, if US interest rates rise next month, assuming the Fed goes ahead with “liftoff” in September, that could strengthen the US dollar again and be a further setback for emerging market currencies and commodities (more on this below). We’ll have to see.

China’s Economy Shows More Signs of Weakening

It’s no secret that China’s blistering economy has slowed significantly this year, with its official estimate of GDP growth now down to 7% for 2015. Until last week, most forecasters believed that China’s real growth rate was probably closer to 3-4%, but of late, new reports suggest it may be even lower. China’s manufacturing index has plunged since last summer, and last week’s report was even worse than expected.

Global Market Chaos China

It’s not that China is expected to fall into a recession this year, but evidence from both shipping (exports) and factories suggest that the economy is contracting rather rapidly. Fortunately, other reports suggest that the current contraction will stabilize soon and begin a modest rebound, thus avoiding the so-called “hard-landing.” That remains to be seen.

The other China issue that is rattling global equity markets is the recent two-day devaluation of the yuan (also called the renminbi). The 4% devaluation over August 11-12 was the largest single move since 1994. However, as I explained in my Blog on August 13, the yuan has risen sharply since 2005 (see chart below), so the latest devaluation is probably not significant overall.

Chinese authorities don’t want the yuan to devalue much further because the country is already experiencing enormous capital outflows. It was widely reported last month that some $800 billion has fled China this year. The Telegraph (of London) reported over the weekend that another $100 billion has fled the yuan so far in August.

It goes without saying that China is facing major problems: its decelerating economy; the recent plunge in its stock markets; and the surprise devaluation of its currency. It remains to be seen how these problems will be resolved. In the meantime, expect more pressure in the global equity markets.

Note to Donald Trump: Get Your China Facts Straight

On August 11 at a campaign event in Michigan, Mr. Trump said the following about China:

I think you have to do something to rein-in China. They devalued their currency today. They’re making it absolutely impossible for the United States to compete, and nobody does anything…

Well, you have to take strong action. How can we compete? They continuously cut their currency. They devalue their currency. And I have been saying this for years.

They have been doing this for years. This isn’t just starting. This was the largest devaluation they have had in two decades.

Mr. Trump, I doubt that you read my work, but for the record, I would like to set you straight on the subject of China devaluing its currency. You need to know this and get your facts straight. Just take a look at this chart on China’s currency.

Global Market Chaos China

China has consistently appreciated its currency for the last 20 years – by more than 100% over the last three decades. Your assertion that “They devalue their currency…They have been doing this for years.” is simply wrong, as the Bank for International Settlements confirms above.

Mr. Trump, I like that you are in the race for the GOP nominee. In general, I like how you are shaking up the political landscape. I don’t know if I could vote for you in the GOP primary, but it would help me a