On September 17th, the Federal Reserve noted that they will not be raising rates off the zero bound range all the while they will be monitoring developments abroad. Those three words, “monitoring developments abroad,” were seen as the most important of the Federal Reserve statement as well as discouraging for those expecting a return to normalization of the Federal Reserve’s monetary policy historical measure.
Let’s unpack what developments abroad referred to is that you can monitor them along with Janet Yellen and the Federal Reserve.
What developments abroad?
In short, China, oil, and volatility centered around equity markets and bonds seem to be front and center on the feds dashboard. Since Janet Yellen took over for Ben Bernanke, she has presented herself as one who is concerned about not shocking the markets. The message she delivered on Thursday was interpreted as a further extension of that concern given the volatility we’ve seen over the last month and a half which commenced with Chinese devaluation of their currency, the one.
In looking at the Yuan, is likely better to have your eyes on the bigger picture in the Asian economy and not just on the currency. The Yuan is seen as an effect and thereby a lagging indicator as opposed to a cause of some of the problems seen in developing economies and markets like China. If you take a look at the BRICs, which is the famous acronym for the world’s leading emerging economies of Brazil, Russia, India, and China you’ll note all but India are having a very difficult time.
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The last month has not been kind to Brazil, who was once the darling of the South American economy. Recently, the government’s debt rating in Brazil was cut to junk status making it increasingly difficult to attract capital to grow their economy, which is aligned with the Brazilian president dealing with a recession, corruption allegations, and rising inflation alongside spiraling unemployment.
Other emerging economies like Russia are crashing because of the drop in oil prices which had $37 a barrel on August 24. The sustainability of many emerging market economies out of the great financial crisis was reliant on the tripling in oil prices from $35 a barrel to over hundred dollars a barrel in the move higher from 2008 to 2012.
However with the drastic drop in commodity prices, most notably oil currencies have weekends and servicing their large amounts of that has become an almost unmanageable problem. Add to that, many of the emerging economies in the world do a lot of business with China whose own purchasing has fallen rather sharply. In early September, South Korea, whom exports more to China than any other country noted that their year-over-year exports have declined by 14%. This was an indication that countries that relied on the growth China and oil to sustain their economy were getting hit with a financial double-edged sword.
Equities & Bonds
One of the more popular stories at the beginning of the year was the Chinese stock market, the Shanghai composite, which in one year from summer of 2014 to June 2015 rose over 150%. That market rally has since been cuts down by nearly 2/3. Additionally, other equity markets have felt the pain all the while bonds continue to move higher and equity slower.
From a social confidence point of view regarding the trillions of dollars of quantitative easing central banks, most notably the Federal Reserve have engaged in, the equity markets are a popular barometer albeit ineffective of a growing broader economy. The recent volatility to in the summer and open up the fall could continue to keep the Federal Reserve and many currencies in check until these themes subside. Until then, the volatility caused by the events above could further see a flow into safe haven currencies.