This past weekend’s summit of G20 leaders left a great deal in doubt for economic prognosticators, with conflicting messages and admitted discord among some of the leading voices in economics and finance around the world. With so little resolved heading into the last week before the all-important September meeting of the Federal Reserve’s Open Market Committee (FOMC), it would appear that the global economy is poised for still more volatility.
“Divergence” to Remain in Place
One of the key issues facing the leaders of the world’s 20 largest economies who gathered at the summit in Ankara, Turkey is the level of volatility that the global markets have experienced over the past 3 months or so. By all indications, this up-and-down pattern of late is due to the fork in the road in central banking policy around the world: while two of the major world powers (the U.S. and the U.K.) make preparations for the first steps in normalizing (tightening) monetary policy, there are several developed economies (Europe, China, possibly Japan) who are at the same time moving policy in the opposite direction, preparing their central banks for even more stimulus—easing of central bank policy.
The 20 member nations represented at the summit make up roughly 85% of all global output as measured by gross domestic product (GDP).
Dissent Between Asian Powers
A second kind of divergence also became a hot topic at the conference, one between the two biggest players in the Pacific region, China and Japan. Much of the focus at the summit centered on the Chinese economy’s supposed “hard landing” after a sharp correction of its equities market and the progressive slowing down of its manufacturing sector. Although the People’s Bank of China has (deservedly) developed a reputation for intervening in its currency markets in order to devalue the yuan and boost the attractiveness of its exports, the central bank has surprisingly made an about-face and is now following the guidelines of the IMF to stabilize (rather than manipulate) its currency.
This effort by the PBoC to seek an equilibrium for the yuan (AKA renminbi) is geared toward appeasing the wishes of the IMF, whom China is attempting to garner the favor of in order to get the yuan included in the Fund’s Special Drawing Rights (SDR or XDR), a sort of international reserve currency that is made up of a basket of the world’s most prominent currencies. As it stands, the SDR is comprised of the dollar ($), the euro (€), the yen (¥), and the pound sterling (£), each weighted based on the prevalence of its use in international transactions. Every 5 years, the IMF reapportions the weights of the currencies, and may also decide to reshuffle the selection of currencies it includes. The next reapportionment falls in 2015, though the IMF has specifically delayed the scheduled decision in order to give China time to potentially meet certain guidelines to improve its chances of having the yuan included. It remains to be seen if the basket will expand to 5 currencies or if the yuan will have to displace one of the existing 4.
Japan, as China’s bitter regional rival, holds a less favorable opinion of the stewardship China has shown with its currency and its economy. Japanese Finance Minister Taro Aso offered skepticism that China will be able to manage its “hard landing,” and even questioned such a characterization of the economic downturn in the People’s Republic. In essence, the incredibly expansion of the Chinese economy (and sphere of influence) in Asia over the last 25 years has directly eroded Japan’s once-dominant market share in the Pacific prior to 1990.
The outlook expressed by the leaders gathered in Ankara would seem to point toward more policy divergence and market volatility over the rest of 2015, and possibly into 2016. By nature, volatility is difficult to predict, especially the intensity and direction of such swings in the markets. That’s why the precious metals continue to hold safe haven appeal for traders who are trying to balance the risk profile of their investment portfolio.