George Lucas
Many may have thought steady US rates would be good news for global markets, but not so, says George Lucas, managing director Instreet Investment.
The Fed’s failure to raise rates reinforces investor concerns about the health of the world economy, particularly China, he added.
The Chair of the US Federal Reserve, Janet Yellen, has sought to calm markets by saying a US rate rise is likely to happen this year. Her comments come after the Fed kept rates steady at its September meeting last week adding to volatility in the market.
“Yellen’s recent comments calmed markets, but it seems to be a case of too little too late.”
“If the Fed really wanted to alleviate concerns, it should have hiked rates at their meeting last week. Yellen’s caution that a rate rise in 2015 may fall over if there are any economic surprises, probably didn’t help either.”
“So what is the Fed looking for? The US is experiencing strong growth and strong employment. So much so, second quarter growth was revised up to a strong 3.9 per cent and the next employment report is meant to show gain of 200,000 in payroll employment. It begs the question why interest rates are at zero and what needs to happen for the Fed to raise rates?”
“Firstly, volatility in the market will need to reduce. And secondly, we’ll need to see signs that Chinese growth has stabilised.”
“Of course this creates a catch 22 situation because the Fed not raising rates adds to market uncertainty. It also means that every bit of data out of China will be scrutinised.”
Chinese economy update
Against this backdrop, China’s flash PMI falling from 47.3 in August 47.0 in September doesn’t help.
The drop in the PMI was mostly driven by declines in output and new orders. However, the recent weakness does not corresponded to a fall in broader economic activity including the services sector. So in our opinion it’s not pointing to a deepening economic crisis.
Looking elsewhere, PMIs for the major economies do not paint a picture of increasing global growth.
We also see that exports are being hit which is hurting export orientated countries like Japan, Germany and China.
However, we do need to remember that PMIs only reflect what is happening in the manufacturing sector despite the services sectors in these economies now being much larger.
Potential for US shutdown ?
Just when you thought it was safe to go back into the water, markets will be watching the US this week where there is the possibility the US Federal government will shut down.
Congress needs to pass a continuing spending resolution to keep the Federal government open beyond this Wednesday. If the debt ceiling isn’t raised soon, another crisis over a potential debt default will occur in either November or December.
The market believes the likelihood of a government shutdown have been reduced after the Speaker of the House, Boehner, stepped down.
Volkswagen surprise
Markets and media this week have been dominated by the unbelievable news of Volkswagen’s deceit and also falls in the BioTech industry. The VW story has affected car stocks globally as other countries now begin investigating the emissions of VW and other car manufactures.
In BioTech, the sector began falling after Hillary Clinton came out and announced a policy to cap the amount drugs that can be sold in the US. The fall in BioTechs and Pharmaceuticals has been the main drag on the US stock market this week, whilst consumer discretionary continues to perform well.
Overall, it’s too hard to make a call at the moment. We would advise caution on bargain hunting while the uncertainties remain.
By George Lucas, Instreet
