Sell-Off Intensifies

August 24, 2015

A sell-everything mood pervades stocks.  At 15,636 shortly after the open, the DJIA was down 5.0% on the day and 14.8% from its all-time high of 18,351 last May 19.  This was the first correction (a drop of at least 10%) since 2012 and just 5.2 percentage points shy of a bear market (20% or more).  Moreover, at 15,636 the DOW had risen just 1.9% per year over the past 15.6 years, down from an appreciation of 16.9% per annum over the prior 17+ years between August 12, 1982 and January 14, 2000.

The immediate catalyst for this sell-off has been concern about China.  The Shanghai Composite Index fell 8.5% today, most since 2007, creating contagion in stock markets around the world.  Within the Pacific Basin, Japan’s Nikkei lost 9.8%, and equities fell by 5.8% in Hong Kong, 4.8% in Taiwan, 5.9% in India, 4.3% in Singapore, 4.0% in Indonesia, 4.1% in Australia, and 2.5% in South Korea.  Losses so far today in Europe amount to 10.5% in Greece, 6.4% in France, 5.9% in Italy, 6.2% in Spain, 5.5% in Germany, and 5.4% in both Switzerland and Great Britain.  The S&P also opened down over 5%.  U.S. stocks are swinging erratically.

Other possible contributing factors to the stock market rout are:

  • Doubts that Greece will actually implemented promised reforms.
  • Dismay over the state of U.S. politics including Trump’s appeal and the destruction of Clinton’s candidacy.
  • Continuing sub-normal growth prospects among advanced economies that this time are being amplified, not blunted, by emerging and developing economy trends.
  • Previously rising stocks did not mirror a stellar real economic performance and were caused instead by unprecedented monetary stimulus that in the U.S. case is already in reversal mode.  A correction appears well overdue.
  • Geopolitical tension — the saber-rattling in Korea, frictions within the eurozone, tension between China and its neighbors, and never-ending mess in the middle east.
  • Plunging oil prices that all but doom efforts to contain global warming.  Climate change is meanwhile accelerating much faster than the most pessimistic scientific predictions had anticipated.
  • The end of the world as we know it seems at hand.  Social evolution simply cannot keep up with the race of technology, which regrettably has failed to lift productivity.

The dollar is falling on a lessening likelihood that the FOMC will raise interest rates next month.  The central bank’s decision will be a political one, meaning that policymakers are free to do whatever they wish, so all outcomes have non-zero probability.  What’s really spooky is that it appears that an exit strategy from zero interest rates without entailing major value destruction to financial assets seems implausible, and markets are having trouble with this truth.

Compared to Friday closing levels, the dollar has fallen 3.4% against the yen, 2.4% relative to the euro, and 1.5% vis-a-vis the Swiss franc.  Commodity-sensitive currencies are down against the dollar.  Losses amount to 1.7% in the case of the Aussie dollar, 2.6% for the kiwi and 0.5% in the loonie’s instance.  Sterling is 0.5% firmer against the dollar.  The Chinese renminbi is being held unchanged, but is trading at a 2% discount offshore.

West Texas Intermediate oil has tumbled 5.6% to $38.19 per barrel, but Comex gold is 0.5% firmer at $1,164.84, a surprisingly small appreciation in light of the dollar’s drops from 2015 highs of 10.7% against the euro and 7.7% against the yen.

The ten-year Treasury yield had been as much as ten basis points down earlier today and now shows a net drop of 7 basis points.  Ten-year German bund and Japanese JGB yields have fallen two bps each, but the 10-year British gilt is six basis points higher after the Confederation of British Industry revised its GDP growth forecasts upward to 2.6% for this year and 2.8% for 2016.

Projected Swedish growth was revised higher by that country’s government to 2.8% in 2015, 2.8% in 2016, 2.6% in 2017 and 2.4% in 2018.

Consumer confidence in the eurozone recovered 0.3 points to a preliminary reading of -6.8 in August.  Such had weakened in the four prior months from a 2015 high-point of -3.7 in March.  -6.8 is still a very low score and doesn’t capture the reaction to the equity market debacle.

Likewise, the Chicago Fed National Activity Index improved by 0.44 points to a 12-month high of +0.34 in July before the rout in stocks began.

Japan’s index of leading economic indicators for June was revised down by 0.7 points to 106.5.  Although the index of coincident economic indicators recovered a full 1.0 point in June, officials retained the trend classification of “weakening” for a second straight month.

Consumer prices in Singapore fell 0.4% both on month and on year in July.  Finnish producer prices sank 1.1% in the year to July, but Ireland’s PPI climbed 6.8% in that span.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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