Tuesday August 18

Stocks fall on further turmoil in China’s markets and heavy selling in emerging markets. The S&P500 lost 0.3% to 2,096 while the Dow fell 0.2% to 17,511. Housing data today showed that housing starts were 1.206MM in July compared to the consensus estimate of 1.180MM. Housing permits, which tend to lead starts were only 1.119MM which was lower than the estimate for 1.230MM. The Shanghai index and the Shenzhen index both fell by 6.1% and 6.6% respectively which were the worst losses since July. These losses were due to a relatively strong report that led investors to price down the possibility for stimulus. With these losses some international investors speculate that the renminbi may devalue further. Emerging market currencies, especially the Indonesian rupiah and the Malaysian ringgit continue their losses. Commodities fall as a result of these further negative developments in China. The dollar index rose 0.2%. The 2 year yield rose 1 basis point to 0.72%, and the 10 year rose 5 basis points to 2.20%.

Troubles continue for investors in emerging markets. Outflows from emerging market investments over the last 13 months are approaching the $1tn mark, which doubles the figure at the time of the financial crisis. Emerging markets are experiencing a slowdown as a result of China’s demand and investors expect that these countries will experience slower growth going forward. China’s devaluation and Fed tightening make these expectations even worse. As emerging market currencies fall, imports into these countries become more expensive. To reflect this imports into emerging markets were 13.2% lower from the previous year. As demand decreases prices for many goods such as commodities fall, which hurts economies in other markets as well.

Bank of England tightening draws closer as inflation begins to pick up. Reflecting these expectations, the british pound rose 0.8% against the dollar to $1.57 (dollars per pound). The pound also appreciated against the yen, swiss franc, and the euro. A 0.1% rise in inflation from the previous year which beat expectations for either a flat or negative reading. Core inflation, which removes the effect of food and energy prices, rose 1.2%.

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Tuesday August 18

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