3 Stories in the global economy that should not go un-noticed
As expected, news from the Fed dominated markets last week. Equities started the week with steady gains, suggesting that investors expected mostly reassuring words from the Federal Reserve meeting of governors. However, Wednesday's official FOMC announcement and subsequent comments by Ben Bernanke pushed markets to recent lows.
The Fed chairman stated that, should economic conditions continue toimprove, the central bank could reduce the pace of bond purchases. Recent economic data supports Bernanke's optimism.
For the week, the S&P 500 fell 2.11%, the Dow lost 1.8%, and the Nasdaq trimmed 1.94%.
Here are the 3 stories this week that rose above the noise:
China’s Central Bank PBOC Addresses Cash Crunch
A People’s Bank of China official said on Tuesday that the central bank will guide interest rates to a “reasonable range,” suggesting a potential end to the cash crunch that has gripped the country’s financial system this month. Concerns over China’s credit crisis have contributed to market volatility over the past several weeks.
However, recent analysis by other commentators suggests that the government has the capacity to absorb the private sector credit losses, should they occur. A weekend article in Barron’s estimated China’s bad debts could total $3.25 trillion (20 percent of total debt outstanding) compared to a formidable array of assets the government could use to fight off a financial crisis, including $3.1 trillion of central bank loan reserves and $3.4 trillion of foreign-currency reserves.
Additionally, China could privatize state-owned enterprises and take on more federal debt given its conservative 30 percent debt-to-GDP sovereign debt ratio.
Central Bankers Move to Soothe Market 'Exit' Fears
Since the beginning of May, when the Federal Reserve began to hint that tapering of its quantitative easing (QE) program may begin soon, yields on Treasuries have leapt. Many other central banks that have also implemented similar programs to QE have come out recently with comments that they do not plan to follow Bernanke’s lead and taper their asset purchase campaigns.
Both the Bank of England and the European Central Bank remain committed to monetary easing. Some central bankers have also made comments that the recent selloff in U.S. Treasuries may be an overreaction to the Fed’s tapering comments. “The Federal Reserve has merely said that the easing, in which it is still engaging, may taper at some point depending on economic conditions,” said Bank of England Governor Mervyn King.
Exit from the Bond Market Is Turning into a Stampede
The New York Times’ Dealbook section provided an overview of the recent volatility in the bond market which was triggered by statements from Fed Chairman Bernanke last week indicating that the strength of the U.S. recovery might allow the Fed to begin to reduce its asset purchases later this year.
The article includes a good summary of some of the factors driving the volatility, including leveraged bets by institutional investors that are being reversed and intense selling of bond mutual funds and ETFs by retail investors. Also noted are statements from Fed officials yesterday which appear designed to calm markets. As noted in the article, it is difficult to know when the stress in bond markets will subside and market participants will be closely watching for signs of stabilization in the coming weeks.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
