Currently the emerging markets are facing market crisis, just similar to the one witnessed in 1997. However, this time there will be a higher impact on the developed markets. This is because economic growth and global trade will be affected by lower purchasing power in emerging markets and commodity and other goods markets will be affected by deflationary price effects.
As the global markets witness another wave of deflation, raising the interest rates would be a very big mistake. This is because raising interest rates at this point would not only further increase the problems in emerging markets, but it will also intensify the drag on global growth and result in negative consequences for equity markets.
The emerging markets will require several months to stabilize from the ongoing market volatility. However, until the Fed announces anything about the path of interest rates, the market volatility would likely continue through the month of September. The matter of the fact is that a US interest rate rise might have been in favor of the markets a few months ago, but not anymore with the market volatility.
The current market volatility position is in no way ready for the markets to accept any policy mistakes. Hence, the Fed needs to assure that for the time being they will not take any such action that might result in a policy mistake and harm the markets. This needs to be avoided until market volatility has eased, confidence restored and an upwards trend in the markers has resumed.
The stock market performance globally over the week was really bad. The Nikkei 225 fell by almost 7%, followed by Sensex 30 by 4.51%, Hang Seng by 3.57%, S&P 500 by 3.4%, FTSE 100 by 3.28%, Dow by 3.25%, NASDAQ by 2.99%, Germany’s XDAX by 2.53% and Shanghai by 2.23%. The gold prices also fell by 1.28% and Brent crude oil prices fell by 0.38%.
In the Chinese market, the manufacturing PMI (Purchasing Managers’ Index) declined from 47.8 to 47.3, which was its lowest in the last 6 years. The Services PMI also declined to 51.5, but was still in expansionary mode. According to the Financial Times, the Chinese government has decided to abandon attempts to boost the stock market through large-scale share purchases. However, in an effort to increase investor confidence, the National People’s Congress of China introduced a debt ceiling for local government debt.
The head of ECB (European Central Bank) Mario Draghi assured that the ECB was willing to extend the region’s monetary stimulus programme, if needed beyond September 2016. Draghi also pointed out the stresses in the global economy by lowering the inflation for the Eurozone and forecasting lower growth, down to 1.4% this year. It is also important to note here that the interest rates were left unchanged at 0.05%.
Overall the European market showed positive results over the week, despite the downside risks. For instance, Germany’s retails sales grew at the fastest rate of growth in the last 9 months, growing by 1.4% in July. The Eurozone’s unemployment rate dropped from 11.1% to 10.9% in August. This was the lowest unemployment rate in the last three and a half years. The PMI for the Eurozone experienced a minor decline from 52.4 in July to 52.3 in August. Whereas, for three months in a row, the consumer prices increased in August by 0.2%.
In the US, as a result of a weaker demand from the emerging markets, Markit manufacturing PMI and the August ISM manufacturing index showed slower growth. As a result of which the manufacturing sector saw a loss of 17,000 jobs. The number of new jobs added in August was 173,000, less than the forecast, this resulted in another disappointment for the markets. However, the US market witnessed a fall in unemployment rate from 5.3% to 5.1% and a better than expected rise in average hourly wages. This led to confusion among investors. The US government also reduced its crude production estimates.