Monday August 31

Stocks fall capping the volatile month with large losses. The S&P500 fell 0.8% to 1,972 and the Dow lost 0.7% to 16,528. The S&P lost 6.3% this month and the Dow fell 6.6%. Losses today in the US followed renewed selling in China. China’s markets were negatively impacted by reports that regulators stopped supporting markets by way of share purchases. Some analysts estimate that central regulators have spent $200bn supporting stock prices over the last weeks. In spite of China’s economic downturn and subsequent devaluation the Fed still believes the underlying US economy is showing signs of improvement, which lead some to believe that the FOMC will raise rates even in spite of the global economic turmoil. To reflect these expectations the 10 year Treasury yield rose 2 basis points to 2.20%.

Oil prices have rebounded sharply in recent trading sessions rising 25% in last three days. Crude oil last week reached the lowest level in six years. To start off this week WTI rose 8.8% to $49.20 after trading in the mid-high thirties last week. Brent rose 8.2% to $54.15 after trading in the mid-low forties last week. The price resurgence today was in part due to commentary from OPEC. OPEC over the last year was adamant that it would not taper production (and subsequently decrease market share) in order to maintain high prices. This sent prices plummeting down to recent lows. A note from OPEC today read that “Opec… will continue to do all in its power to create the right enabling environment for the oil market to achieve equilibrium with fair and reasonable prices… it stands ready to talk to all other producers. But this has to be on a level playing field.” Traders speculate that this may suggest the group is ready to adjust production to keep prices high. This would potentially reduce the supply side of the market therefore boosting prices. Many countries in OPEC, such as Saudi Arabia, need oil prices to be around $100/barrel in order to balance budgets.
With monetary policy coming to the center of attention for all investors, some analysts are concerned that aggressive monetary easing is leaving central banks with little additional power. With interest rates at such low levels (essentially zero) the Fed and other central banks essentially have no bullets left in the chamber to combat further economic downturns. In China, where the PBoC has been aggressive cutting interest rates and reducing reserve requirements over the last year aggressive monetary policy has been ineffective as markets continue to sell off. This leaves the central bank with few tools to intervene in markets and even worse, it damages the credibility. There are various economic issues with which it remains to be seen whether or not monetary easing is an effective solution. These include high levels of debt, low productivity, unemployment, demographic issues, political reforms and fiscal stimulus. These same questions are even applicable in the US and the UK where wage growth remains slow in spite of a recovery in various other metrics. In these regions the recovery has been uneven geographically, and varying among firms of different sizes. Alberto Gallo (the head of macro credit research at RBS) fears that asset bubbles, uneven allocation of debt across industries and companies, and economic inequality as adverse consequences to the prolonged monetary easing that has been apparent around the world over the last few years.
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Monday August 31

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