• A quick synopsis of recent market developments today.
• Last time I wrote I was opining about how resilient the rattler was – those were good days.
• Since then things have turned rather sour. There is however no truth to the rumor that my colleagues are spreading that I am somewhat of a reverse indicator.
• Sadly the Rand has lost all of its recent gains in a few sessions.
• Why so sudden, and why so violent?
• There are two particular causes for the stress that has engulfed financial markets over the last two weeks.
• The first cause is what’s happening over in China.
• After decades of stellar growth engineered by the ruling parties market friendly policies, things have turned decidedly messy, particularly in the property sector. Bloated balance sheets amongst that nations property developers is dragging the economy downwards, even as the authorities try to open up the economy after the disaster that was Covid.
• This has caused the Chinese currency to weaken dramatically dragging many EM currencies along with it.
• The other major cause of stress is the US yield curve. The market has been waiting for some time for the US economy to roll over, signaling that the FED can pause and eventually begin to cut rates, but this is just not happening. Employment remains strong and most indicators are showing a very resilient US backdrop which means that US rates will remain higher for longer.
• US treasury markets have reacted with yields rising by over 60bp in a few short sessions.
• All of this has put the skids under EM asset classes, and with domestic fundamentals remaining in ICU, investors are demanding higher risk premiums.
• So where to from here? ….always the trillion Usd question.
• The Chinese are trying to inflate their economy by continuously adjusting short term rates. But that keeps adding to Yuan weakness, which means that our own terms of trade (currency price) needs to adjust to keep pace. This as commodity prices are dragged down by a slowing Chinese economy.
• The other problem is that global debt has continued to rise at alarming levels, something that we have highlighted many times – resulting in outsized bond issuances across the globe, a supply that struggling to be met with required demand.
• The move has been swift and violent, and the market is as uncertain as Liverpool FC’s transfer policy.
• The only certainty as they say is uncertainty.
• Good luck.