Article below is telling me that I'm on the right track to bet on equities via bond markets.
It's simple. When yields rise; bonds price and equities fall.
In late hours before the Fed decision short term yields were up.
In Europe bond yields were mixed in different assets class due to political uncertainties in trouble countries. Example Greek .
In Japan yields were stabilizing.
I'm looking forward in China' bonds price issuance to see whether they affect the US's inflation. I believe bonds price must go up to attract investments. That will be positive for equities.
Europe and China do lift market sentiment by producing more stimulus but those take longer time to push inflation up.
If US wants to see good news out of Europe, China and Japan. I think they would need to wait a bit longer. If market sentiments do lift while Euro and Yuan are stabilizing. A little bit of a US rate hike won't matter much.
Japan will take the whole goodness out of higher currencies and off course oil will spike.
Not for the first time, the world’s two largest economies are in a symbiotic embrace.
Following months of speculation, the US Federal Reserve opted this week not to raise rates, from the effective zero level at which they have been locked for almost seven years. It palpably wanted to raise rates. US unemployment — named a determining factor ahead of the decision — continues to improve.
The decision not to raise rates was just what many in the world’s stock markets had been screaming for. Stocks like cheap money. But the reaction has been negative. Europe’s FTSE-Eurofirst 300 index dropped 1.92 per cent yesterday, following a similar fall for Japan’s Nikkei 225. In the US, the S&P 500 had dropped 1.15 per at mid-session.
This reaction was down to the way Janet Yellen and her colleagues chose to explain their decision. The Fed remains reluctantly on hold primarily because of a blast of deflationary pressure from China. As China’s future is uncertain, the Fed has to remain uncertain over when it can start to raise rates. And there is nothing the markets like less, as the old cliché states, than uncertainty.
The market was particularly spooked by the addition of this sentence to the Fed’s communique: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”
The Fed should always have an eye on international developments. But its choice to make this clear was taken as a message that the Fed was not in control of events, and that it was more worried by China than others are.
So, what is the matter with China, how does China affect US monetary policy, and how does the dance between the two Great Powers affect everyone else?
China’s economy, by any measure, continues to grow. However, evidence from official data, and particularly from private research groups’ analysis of public data on economic activity, such as on electricity generation, suggest that its rate of growth has slowed rapidly.
Further evidence for this comes from China’s leaders, who have appeared desperate to prop up their stock market and allowed their currency to devalue slightly last month with no prior warning, sparking weeks of volatility.
This does not much affect the US through trade. The US does not export that much to China — although Asian nations, big commodity exporters like Australia and Brazil, and western European manufacturing powers led by Germany, are all prone to be more affected. (The latest German export data suggest little damage so far from China.)
And it affects commodity prices, which are falling. Demand for metals (down 2 per cent since the announcement according to Bloomberg’s index) rests on China. A slowing China also slows demand for oil (Brent crude is down 2.3 per cent since the Fed spoke).
This affects everyone by pushing down prices, which is good for consumers and for commodity importers, such as India. It is bad for countries where business investment has been driven by high oil prices (as in the US shale boom), and it pushes down inflation, which the easy US monetary policy has been designed to push up. Inflation forecasts derived from the bond market suggest that US inflation will run at less than 1.6 per cent over the next decade — below the Fed’s 2 per cent target.
The implication is that after months of watching US labour data, we all need to watch China like hawks (or doves). If signs of a slowdown intensify, then the zero interest rate regime in the US could last much longer. If the situation calms down, then US rate rises might rise before the end of the year — a possibility that futures markets now put at 46 per cent (having rated it a virtual certainty). But it is hard to see such a clear resolution to China’s issues in the next three months, so the odds now appear to me to be strongly against a 2015 rise.
In the longer term, the symbiosis between the US and China runs deeper. China — and many central banks — has built up huge reserves of dollar-denominated assets, which now total more than $10tn. That “Great Accumulation” — as Deutsche Bank dubs it — appears to be over, and reserves are declining.
When China pays down its reserves, it no longer diversifies its holdings — or in other words, sells dollars to move into other currencies. That practice weakens the dollar. So in recent years the euro has strengthened when China is piling up dollars, and fallen when it is not. Sales of dollars would weaken the euro, and also the already stretched emerging market currencies. And they would means higher yields on short-term US bonds, in which reserves are held. That, Deutsche says, could mean “quantitative tightening”. US yields would rise, doing a job otherwise done by the Fed.
The Fed is right to watch China — even if it perhaps scared the markets by saying it so clearly.
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BRU Price at posting:
33.5¢ Sentiment: Buy Disclosure: Not Held
