No, it’s not European debt; rather it’s Chinese deflation (excerpt):
Chinese monetary policy failure
“Fed tapering” seems to be repeated in every single story in the financial media over the last couple of days. However, I am afraid that the financial media – as often is the case – is overly US centric. We might want to look at another central bank than the Fed. We should instead pay some (a lot!) of attention to the People’s Bank of China (PBoC)...
...It seems to me that the PBoC is just continuing the excessive tightening and that seems to be the real culprit behind the stream of bad economic data we have got out of China recently. It looks like Chinese monetary policy failure.
So yes, Bernanke might have a communication problem, but at the moment it seems like the biggest monetary policy failure is Chinese rather than American.
The article Lars quotes shows some pretty worrying developments in the Chinese interbank market – rates have spiked, indicating a liquidity crunch that the PBoC is not accommodating.
To corroborate this info, watch gold…I’ve always felt the runup in gold prices this past decade was more a story of Chinese (and Indian) monetary policy than the Fed’s. As of yesterday, spot gold is at its lowest level since January 2011 – today’s price has fallen to levels not seen since September 2010, before recovering a bit.
That aside, this is not good news for anybody, especially commodity exporting nations such as Malaysia. I’m afraid weakness in the Ringgit is going to be much more persistent that I expected, and growth harder to come by.
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Are you predicting a recession soon? I have a property, do you think it is the right time to dispose of it now?
ReplyDeleteThere are no signs of a recession just yet, but trade is likely to be worse than expected.
DeleteTerima Kasih, and keep up the good work, I enjoy your articles alot, very useful.
DeleteHishamh,
ReplyDeleteMorning, appreciate if you will shed some light on the recent sell down of bonds and stock just because Fed said going to reduce / stop the stimulus. I cannot understand this phenomenon why the simultaneous actions.
Thank you.
Zuo De
Zuo De,
DeleteQuite simply, reducing/ending QE would have the immediate effect of reducing potential demand for bonds, since QE is essentially purchases of government/agency bonds by the Fed on the open market. Reduced demand implies lower bond prices and thus higher effective yield. Since government bonds are the foundation of the debt markets, there is a knock on effect on corporate bonds as well.
Bottom line is that long term interest rates should go up. And this explains the equity sell-off as well - higher interest rates imply higher borrowing costs, leads to lower corporate profits and thus lower equity prices.
The interesting thing from an economic theory perspective is that this incident provides some support for the strong-form version of the efficient markets hypothesis - markets are responding not to current changes in the monetary environment, but future expected changes.
Thank you, your explanation is very clear compared with other articles in the newspapers, etc.
DeleteHope the haze does not affect you too much.
Zuo De