Highlights in the week of August 10, 2015

Dear PGM Capital Blog readers,

In this weekend blog edition, we want to elaborate on the following financial news out of China, that has impacted the Global Financial Markets last week:

  • China has devalued its Yuan with approx. 3 percent against the US-Dollar.
  • China has slashed approx. 180 billion US-Dollars in US-Treasuries securities.

On Tuesday, August 11th, the People’s Bank of China surprised markets by devaluating their currency, the Yuan, against the US-Dollar.

As can be seen from below chart, China’s currency has fallen 2.9% against the dollar in the week of August 10, setting the currency up for its largest decline in 28 months.

Analysts seem divided on whether this is the start of a more flexible currency regime for China or an old-style devaluation. It appears to be a bit of both.

According to US Treasury data show that China beginning in March 2014 on the continued reduction of US debt, after it has been predicted that if China suddenly sells its huge foreign exchange reserves, it will be a serious impact on the US bond market, such fears are now opening up it’s superfluous.

China’s holdings have fallen in two ways. First, active trades show US$19.4 billion of net note and bond sales this year through May. Second, holdings data indicate China has opted not to reinvest the full proceeds of maturing securities back into Treasuries. Those measures combined to lower the country’s stake in the debt by about US$180 billion from its apex.

China was the great saviour of the world economy in 2008. The launching of an unprecedented stimulus package sparked an infrastructure investment boom. The voracious demand for commodities to fuel its construction boom dragged along oil- and resource-rich emerging markets.

As can be seen from below chart, according to official data, the Chinese economic growth has dipped below 7 percent, for the first time in a quarter of a century.

The People’s Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc. Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame.

Data for exports showed an 8.9pc slump in July from the same period a year before.

The China slowdown has sent shock waves through commodity markets.

As can be seen from below chart, the Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.

Based on this, China’s authorities have taken a shock decision to let the yuan – also known as the renminbi – devalue by approx. 2.9 percent against the US dollar as they try to fend off slowing growth and to promote export.

Another reason for the PBoC’s surprise move on the yuan is that China’s authorities have long wanted the renminbi to gain a coveted status as a global reserve currency.

The devaluation could help the yuan gain inclusion in the International Monetary Fund’s Special Drawing Rights (SDR) basket of currencies  -an elite group of currencies including the US-Dollar, Euro, Japanese Yen and British Pound-  that the IMF uses for its loans.

Based on this the Chinese CSI-300, rallied in the week of August 10, with approx. 3.5 percent as can be seen from below chart.

On the other side the USA DOW-Jones industrial went into the red for the year.

Below chart shows that the Chinese CSI-300 index, Year-To-Date, has appreciated with 15.8% while the USA Dow-Jones Industrial is down 1.94% YTD.

Gold the ultimate safe haven rallied, 2 percent last week as can be seen from below chart.

The Dominoes are beginning to fall:
The great props to the world economy are now beginning to fall:

  • China’s, economic growth – the world economic engine of the last decade – is slowing to near 7 percent.
  • Emerging markets that consumed so many of products, the West produce are crippled by currency devaluation and commodity price slumps.
  • Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 currently stands at 27.2, some 64pc above its historic average of 16.6 as can be seen from below chart.

    On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007 and that in all three occasions the world Economy went into recession and the markets crashed.

Based on this we believe that the world is balancing on the brink of a recession, for which we can expect volatility in global capital markets to increase in the coming months.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

Leave a Reply

Your email address will not be published. Required fields are marked *