The selloff in risk assets from equities to raw materials eased as investors turned to a speech from Federal Reserve Chair Janet Yellen for clues on the timing and pace of monetary policy. The Jakarta Composite Index retreated 1.1 percent, poised for a one-month low. Below, I’ll look at some of the currencies most impacted by the fallout from developments in China. Copper advanced on speculation demand will get a boost from the US housing market.
Those who criticize the Fed for delaying a start to the normalization of USA interest rates due to signs of a Chinese economic slowdown dismiss China as having only a limited impact on the US economy.
Brazil called extraordinary auctions on Wednesday to sell currency swaps and dollars with repurchase agreements, but the interventions did little to support the real, which has lost more than 35 percent this year. “A lot of the daily trading is dominated by algorithms and quants and these dislocations can occur”. Low United States interest rates have encouraged borrowing in dollars, and this capital has flowed into emerging markets in search of higher returns.
Meanwhile, the Vanguard Group has stated that it will add China A-shares to its Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), which tracks the FTSE Emerging Index but will later switch to an index that includes China A-shares at a capped level. “The Fed has to raise rates to demonstrate they are confident in the sustainability of the USA growth“. As such, even if China’s economic growth were a full 5 percentage points below what might otherwise have been the case, all that would do is shave around 0.1 percent off of US economic growth. Mexico’s peso was at its weakest in almost a month.
“Program traders may deliver “$10 billion in purchases over the next few days”, Marko Kolanovic said in a note to clients today.
Commodities won some respite on Thursday, with the index regaining 0.3 per cent after finishing Wednesday at its lowest since August. 26.
“The Fed’s inaction has a number of unintended consequences that led to increased uncertainty and volatility”, said Richard McGuire, head of rates strategy at Rabobank global in London. They are pricing in about a 41 percent chance of an increase in December, down from 49 percent as recently as Monday, and a 48 percent probability in January. The preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics posted its lowest reading in 6-1/2 years. This reduces the odds of a rate hike in October.
The bond market’s inflation outlook for the next 10 years touched the lowest since May 2009, raising questions about the Fed’s ability to increase interest rates this year.
And AXA’s Framlington Equities theorised that the negative feedback loop of a soft mood in emerging markets was making life harder for China. When U.S. interest rates rise, capital flows could reverse, weakening emerging market currencies.
Stock markets in Singapore, Malaysia and Indonesia as well as South Africa, Turkey and most countries in the Middle East were closed for holidays.
Financial companies in the S&P 500 fell as investors speculated that low interest rates would continue to crimp profitability. It weakened 2 percent to 8.46024 per dollar and depreciated 2.3 percent to 9.49668 per euro. “By not doing anything, the Fed is probably forcing other central banks to take action to ward off deflation risks”.
A gauge of 20 developing-nation currencies has tumbled 1.9 percent since the Fed’s rate decision.
The Turkish lira firmed 0.3% against a broadly steady USA dollar. Bullion futures surged 1.9 percent to $1,152.70 an ounce, a four-week high, while silver added 1.6 percent.
WTI crude climbed 1.4 per cent to $45.08 a barrel after retreating the past two days. Other industrial companies slid amid data showing orders for business equipment stalled.