Though the hunger for short-term snippets tells you how difficult it is to keep focusing on the long term when there is so much volatility, we are more than happy to accommodate.
The anxiety amongst investors is quite understandable. We have seen an eye-catching correction in asset prices in the last few weeks with absolutely brutal trading days last Friday and this Monday (21/24 August). After years of relative stability, we haven’t seen a 10% correction in the S&P for quite a while (the last one was actually in the summer of 2011, just after QE1 ended), markets were suddenly shocked.
The world is pricing in fears of a substantial growth slowdown in China and the possible contagion that might have in other markets. Assets closest to the epicentre in China did particularly badly. Oil has corrected 36% since June and the Bloomberg Commodity Index is 15% lower since then. Emerging markets have corrected as well; emerging market equities sold off 29% since April while local bonds lost 14%.
In the last few weeks, developed market equities have joined in the misery as European equities corrected 14% in August and the S&P is down 11% as I type. Adding to the stress amongst investors is that some markets, even the normally very liquid ones, gapped lower in the middle of trading days (on Monday S&P futures lost 5% in a bit more than an hour just before the US open).
My usually spectacular shark diving trips are starting to look a little dull compared to my Bloomberg screens with this market volatility!
I would like to answer the most important 9 questions that are on our minds.
- What is our view on the Chinese stock market sell-off and does it impact the global macro picture?
- What is our view on the yuan devaluation and does it impact the global macro picture?
- What is our view on Chinese growth, and the associated risks
- Why are emerging markets so weak, what are the risks and what are the positives?
- What do we think of the commodity sell-off, is it supply or demand or a bit of both? How does that impact the macro picture?
- Can the Western economy ‘survive’ an emerging market and China slowdown?
- Do these developments point to deflation and more QE?
- Is this a correction or the beginning of a longer and deeper bear market?
- What about the risks?
To see our answers to these questions please see the full piece here