Wednesday August 19

Stocks fall in spite of dovish Fed minutes from the July meeting. The S&P500 fell 0.8% to 2,079 and the Dow fell 0.9% to 17,348. Economic data showed that CPI was up 0.1% on the month, which was lower than estimates for a 0.2% gain. Core CPI has risen 1.8% from the previous year, getting closer to the Fed’s target of 2%. Markets price down the probability for a rate hike in September after the FOMC minutes address concerns of slow inflation, strong dollar, and China’s recent struggles. To reflect the dovish sentiment in the Fed, the dollar index lost 0.7%. In addition the two year yield fell 6 basis points to 0.66% and the ten year lost 7 basis points to 2.13%. Stocks in China sold off to a 5.1% decline before finishing 1.2% higher on the day, leading some to believe that the government once again took efforts to support prices. Oil prices continue to slide after crude inventories were higher than expected which led WTI to a 4.3% decline to $40.80.

FOMC minutes from July 28 meeting cited low inflation, the strength of the dollar, and recent turmoil in China as areas of risk relating to a potential interest rate hike. A rate hike in September does not appear to be imminent. Talking points in the minutes did include how the Fed will communicate any tightening to markets. The unemployment market appears to be approaching the Fed’s target, however FOMC members addressed slow wage growth which may be a contributing factor to slow inflation. At the time of this meeting and these comments China’s devaluation had not yet occurred, so it’s important to consider any additional downside risks that development has on the Fed’s targets.

Germany’s parliament approves Greece’s €86bn bailout package. The votes were 454 in favor and 113 against with 18 abstentions. 63 members of Angela Merkel’s conservative party voted against the plan. Nevertheless, the approval will allow Greece immediate access to funds to repay debts and support banks. With these funds Greece will be able to make it’s €3.2bn payment to the IMF tomorrow. Even the strict Wolfgang Schäuble supported the deal and encouraged German parliament members to vote in favor of the program.

The trend of currency devaluations around the world further continues with Kazakhstan and Vietnam allowing their currencies to depreciate. These countries were negatively impacted by the renminbi devaluation and China’s economic slowdown. In addition, the dollar’s appreciation and the prospect for a rate rise are further headwinds to these countries as dollars will become more attractive to hold. The tenge, the currency in Kazakhstan fell 4.7%. Kazakhstan is heavily dependent on oil prices and trades heavily with Russia and China. Economic troubles in China and Russia along with large depreciations of both the renminbi and the rouble therefore hurt Kazakhstan’s trade. Vietnam’s central bank widened the trading band it allows the dong to trade in and lowered the midpoint rate. This trend is expected to continue as China’s economy struggles.

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Wednesday August 19

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