Stocks rise ahead of the FOMC meetings on Thursday and Friday. The S&P500 adds 1.2% to 2,093 while the Dow adds 1.1% to 17,630. Stocks appear optimistic ahead of the FOMC in spite of further declines in China. Economic developments were weak today, with oil touching a six month low, consumer confidence and home price index data missing expectations. Corporate earnings were positive today with both UPS and Ford beating estimates. RBS analysts expect China’s economy to exhibit a “controlled slowdown” as opposed to a crash, which will still have negative impacts on commodities and countries they trade with. The US dollar and Treasury yields are up ahead of the Fed’s statement tomorrow. The dollar index was up 0.2%. The euro closes at $1.1052 and the yen finishes at Y123.53. The 10 year yield gained 3 basis points to 2.25%.
Emerging market currencies continue to be hit by the global economic slowdown. The rout includes not only commodity producing countries. The South Korean won is down 8.6% against the dollar this year, the thai baht down 12.2%, 19.8% for the Malaysian ringgit, and 27.3% for the Indonesian rupiah. They are facing downward pressure on multiple fronts, including the imminent rate rise in the US (which will make dollar assets more attractive to hold), the slowdown in China (which will hurt trade with EMs), and the fall in commodity prices on which many emerging markets are reliant. The strong dollar brings money out of emerging economies and into developed countries. The biggest losers will be countries with the largest current account deficits. The current account is equal to the sum of the trade balance (exports less imports), income from abroad, and any transfers.
German economists believe that countries should be able to leave the euro. A report today concluded that if debtors are unable to manage their debt they should be able to leave the euro as a last resort. There is currently no framework for an exit of the currency union, as it is supposed to be irreversible. Wolfgang Schäuble has mentioned a five year eurozone “timeout” for Greece. The report stated that “A permanently uncooperative member state should not be able to threaten the existence of the euro.” This shows a shift in sentiment as a result of the Greece crisis. Germany is expected to be strict with Greece, as Schäuble and Merkel have gotten high public ratings from maintaining a strict stance. The economists reject the ideas of a Eurozone Treasury and European unemployment insurance, both of which are methods that would more closely connect eurozone countries). While Germany has rejected this idea, Italy and France have been proponents.