Given the events of the last two trading days in China, which saw the country’s benchmark stock index fall by 8.5% and 7.6% on consecutive days, the worst since 2007, it’s no surprise that global markets are no longer convinced that any tightening of monetary policy is coming from the Federal Reserve.
In response to the freefall of its equity markets, China’s central bank cut interest rates for the 5th time since November in addition to cutting reserve ratios for other lenders. While everyone in the U.S. has been concerned about abnormally low interest rates, the Chinese are engaging in still more easing.
Trying to raise rates now may be the Federal Reserve’s equivalent of attempting to catch a falling knife.
Global stock markets followed China sharply lower on Monday, which stands as one of the worst days for equities since the financial crisis. The Dow Jones opened a staggering 1,000 points lower before cutting its losses to about 2.5% by the closing bell. Many of Europe’s largest stock indices saw their worst single trading day since November 2011, including Germany’s DAX 30 (-4.7%) and France’s CAC 40 (-5.4%). The continent-wide EURO STOXX 600 fell by 5.3%, its worst performance since December 2008.
The earlier closing for trading in Europe is likely what led European shares to close deeper in the red than their counterparts across the Atlantic. The bounce-back was in full force on Tuesday morning, with most stock indices in Europe gaining back 2% to 5%. The major U.S. indices jumped more than 2% each at Tuesday’s open, erasing the previous day’s losses in the process. In a matter of 24 hours, the worst day of the year for equities came and went with everything in the West largely unchanged.
The same was not necessarily true for China, however. Another steep fall for the Shanghai Composite raises doubt about whether or not those markets can fall even farther, although the easing measures taken by the People’s Bank of China may help lift mainland investors’ spirits. Whether the moves are enough to help will remain to be seen. Beijing’s appearance of managing the economy’s “hard landing” will be helped somewhat by the pause in the commodities rout; though the sector remains in the trough of a slump that is the worst in 16 years, bearish traders have at least cut some of their short positions after Chinese stocks tumbled nearly 20% in a matter of a week.
With all of the crash-and-recovery action, the VIX volatility index hit its highest level in over 6 years. Both the euro and the yen saw some safe haven demand, gaining against the dollar to $1.1475 and 119.5/$, respectively, even as the DXY dollar index recovered about 0.8% back to 94.0 on Tuesday morning.
Rickards on the Fed
Renowned gold expert and economic forecaster Jim Rickards recently explained that an imminent rate hike is probably the worst move the Federal Reserve could possibly make, given the circumstances in the global economy. Before the devaluation 2 weeks ago that now lets the yuan float freely, the Chinese currency was informally pegged to the dollar. Rickards points out that this means the end of QE stimulus in the States was a de facto form of monetary tightening in China, by extension. Though the U.S. economy, however sputtering its recovery, has appeared increasingly well-positioned for a normalization of policy even as much of the world aggressively battled deflation, its interconnectedness with China in particular means that the Fed risks seriously disrupting the world economy if it moves too soon.
According to Rickards, central banks relied on quantitative easing measures for far too long and now must wait considerably longer than they had forecasted in order to land the ship, so to speak.