Bit of a bounce in the market, but for how long. What to look out for?
- Soft data out of China
- Declining onshore yuan fix
- Increasing spread between onshore and offshore (Hong Kong) yuan
- Further oil price decline
The China crisis is serious, but not necessarily imminent. The PBoC still has plenty of reserves to hold the line, for now. Only in a month we get new figures about capital outflows and forex declines, and in the meantime we have to watch out for soft China economic data and the yuan fix and spread between onshore and offshore yuan. And of course oil.
That means we could even rally if the yuan and oil hold, and we get some better than expected data out of China. But that doesn't mean the sky is blue, the Chinese problem will be here for quite some time, we fear. The by now already famous RBS quote:
Investors face a “cataclysmic year” where stock markets could fall by up to 20% and oil could slump to $16 (£11) a barrel, economists at the Royal Bank of Scotland have warned. In a note to its clients the bank said: “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” It said the current situation was reminiscent of 2008, when the collapse of the Lehman Brothers investment bank led to the global financial crisis. This time China could be the crisis point.
Sell everything ahead of stock market crash, say RBS economists | Business | The Guardian
Another pessimist is Edwards from Societé Générale:
Albert Edwards, strategist at the bank Société Générale, said the west was about to be hit by a wave of deflation from emerging market economies and that central banks were unaware of the disaster about to hit them. His comments came as analysts at Royal Bank of Scotland urged investors to “sell everything” ahead of an imminent stock market crash.
Beware the great 2016 financial crisis, warns leading City pessimist | Business | The Guardian
Although 20% isn't actually all that catastrophic, we were already down 10% a day or so ago and, as we've argued elsewhere (here), most stocks are already in a bear market.
And of course Larry Summers warned us of this:
Policymakers who dismiss market moves as reflecting mere speculation often make a serious mistake. Markets were on to the gravity of the 2008 crisis well before the Federal Reserve was; to the unsustainability of fixed exchange rates in Britain, Mexico and Brazil while the authorities were still in denial; and to the onset of a slowdown or recession well before forecasters in countless downturns.
Why the Fed needs to prepare for the worst right now - The Washington Post
But of course, also this:
There is little question that markets are highly volatile relative to the fundamentals they seek to assess. Economist Paul Samuelson famously quipped 50 years ago, “the stock market has predicted nine of the last five recessions.”
Why the Fed needs to prepare for the worst right now - The Washington Post