Wednesday September 23

Stocks continue to slide on global growth concerns. The S&P500 fell 0.2% to 1,938 and the Dow Jones fell 0.3% to 16,279. Contributing to ongoing pessimism was Volkswagen, and analysts expect the development to put downward pressure on automakers over the next few months. Economic data out of China also led investors to safety. A manufacturing PMI fell to 47.0 this month compared to 47.3 last month. This months reading were below estimates which called for a reading of 47.5. In spite of global turmoil the dollar index fell against the euro to $1.1184 as Mario Draghi was less dovish than expected. The 10 year Treasury yield added 2 bp to 2.15% as investors continue to price in hawkish comments from FOMC members.

Mario Draghi at the ECB remains open to further monetary easing if needed. He discusses the flexibility of quantitative easing programs in terms of size, timing, positioning on the yield curve, and particular assets to target. The central bank is now in the process of buying 60bn euro each month ($67bn) which is intended to boost the money supply and inflation. Draghi says the central bank will continue to gauge emerging market developments in order to determine whether or not they will be temporary or long lasting. On a similar note he is watching commodity markets to stay ahead of any potential effects on the mandate of price stability. Low commodity prices bring down inflation, which is evident as 12 month inflation in the eurozone is currently running at 0.1%. Some analysts say that the Fed’s inaction may push the ECB to further expand their current program. Draghi mentioned that stimulus has been effective so far and that there have been positive economic developments in the eurozone.
Emerging market suppliers of China remain exposed and under pressure. Many developing economies sell commodities and other manufacturing supplies to China. These countries have been negatively affected by China’s slowdown in addition to the devaluation of the Renminbi. They far further devaluation of the Renminbi, as it would make their products more expensive for Chinese individuals and companies therefore reducing aggregate demand. There has been a very apparent manufacturing slowdown, and unpredictable Chinese policy makers may try to combat the slowdown with further devaluations in spite of statements that they will not participate in competitive devaluations. Prices in emerging markets are falling in emerging markets in order to compensate for less demand out of China which will put a bigger strain on corporations and governments.
Brazil’s central bank intervenes in the open markets to support the real amid the currency’s heavy depreciation against the dollar. Among other methods used to control further for the real, the Central Bank of Brazil announced auctions of dollar repurchase agreements. These agreements allow the central bank to sell dollars into the open market while agreeing to buy them back at a later point in time. This short term form of intervention increases the supply of dollars in the market and therefore provides short term relief for the real. The real finished today at R$4.1325 against the dollar which is close to an all time low. The real has been suffering as a result of capital outflows due to China’s slowdown, falling commodities, a poor political landscape, and imminent rising rates in the US.
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Wednesday September 23

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