Week End Blog – Emerging Market Meltdown!

Forget about Greece, emerging markets are the latest recipe for market turmoil. Especially China, where the economy looks to be in worse shape than anticipated, is causing quite a few headaches. China’s stock market is going nuts. The ‘government orchestrated’ recovery was wiped out in just two days, sending the index back towards the low of earlier this month.

At the same, volatility in Chinese stocks is immense. The graph below shows the intraday moves of the Shanghai Composite Index compared to the intraday moves in the S&P 500 Index. The daily, in some cases hourly, swings in Chinese stocks are difficult to comprehend at times.

To emphasize: Volatility of the Chinese stock market now tops the volatility of Bitcoin.

But emerging market troubles extend beyond China. Russia’s ruble has depreciated 20% against the US dollar in just two months as oil prices have again collapsed. Additional facts: Russian inflation stands at 15.3% and GDP is expected to shrink by 4% in 2015!

Next, Brazil. While a stunning country to visit, its economy has soured. Brazil’s central bank had to lift interest rates a massive 16 times since 2013 to keep inflation at bay. That’s got to hurt. Additional facts: inflation equals roughly 9% and GDP is expected to shrink at least 1.5%.

Growth issues are abundant in emerging countries. The emerging market Manufacturing PMI stayed below the developed country PMI for 26 consecutive months now. On top of that, the PMI level is below the holy level of 50.

To make things worse, the US dollar is currently having its third biggest winning streak of the last 40 years. As monetary policy is diverging, investors seek sanctuary in the Greenback. A rising US dollar is a nightmare for emerging countries.

Compared to emerging markets, Spain is heaven. GDP growth topped 3% for the first time since early 2008. Austerity believers must just love this, right?

Despite the widening Eurozone recovery, inflation levels remain an issue. Headline inflation for July came in at 0.2%, still miles away from the ECB target. That said, reported core inflation was higher than expected at 1.0%. Before you get too exited, that’s also way off target.

In the US, everybody was so busy judging the GDP revisions, the Q2 number got too little attention. It was a decent quarter in which personal consumption beat forecasts. Concerning those revisions: ‘Yes’ the first quarter looks better now, but over a ten-year period it remains the weakest by far.

As expected, the Fed kept rates unchanged. In a deliberately vague statement the FOMC didn’t gave any hints on the timing of the first rate hike. It’s all data dependent, of course. The lowest wage growth since at least 1982 should give those betting on December a heads up. For now, the wait continues. It has been nine years since we have last seen a rate hike. I’m getting anxious…

Despite the disappointing wage growth data, I think the Fed should raise rates soon. Especially since the Fed didn’t seize the opportunity last year. I wrote a short blog this week, containing five charts that show the Fed could easily start hiking rates now.

Thank you for reading the Week End Blog. Enjoy your weekend!

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