Daily Management Review

JPMorgan: 4 drivers for the market chaos in 2016


06/02/2016


Almost everyone has accustomed to the fact that the situation in the world economy is far from stable. Economists, analysts and officials are preparing the world for a crisis, yet it is unclear what its main catalyst will look like.



Thomas J. O'Halloran
Thomas J. O'Halloran
In the opinion of JPMorgan, the four horsemen of the global economic apocalypse are the Fed, the renminbi, monetary policy of Japan and the US election.

US Fed

Raising rates - this is what exactly worries investors worldwide. So far, it is not even clear whether rates will be raised in June, or it will happen in July.

The current month can be dangerous for the tightening of the US monetary policy, since outcome of the ‘Brexit’ vote in the UK does not add optimism and clarity. July may bring the same problem with the market response due to lack of "communication" from the regulator’s side.

While officials insist all that one rate hike will take place in the summer, the other - in December after the presidential election.

Depending on external factors, and the Fed's comments about his plans and policies, there either may start a strong dollar rally, or the currency markets will stay stable. But the chances that the market will be calm are very small.

CNY

Earlier this year, the Chinese national currency hit a low against the dollar, dropping to 6.6. By the end of March, the rate rose slightly, reaching 6.45, and then fell again to about 6.58 to the dollar.

At that, PBOC alternates between periods of strong devaluation and strengthening of the yuan, thereby confusing investors and traders.

Beijing formally disclaims competitive devaluation, but few believe in these words.

Chinese authorities, apparently, are trying to follow a policy of rigid exchange rate, while maintaining the required level of the dollar, but officially, work on market exchange rate is still going on.

The main objective for this year (inclusion of the yuan in the IMF basket of currencies) has been achieved, so China is now going to do everything to maintain the status of its currency at least in words.

However, strengthening of the dollar against other major currencies in recent months has raised the question of the need to promote exports, so the NSC periodically devalue its currency.

Given that the strong devaluation in August 2015 caused panic in the markets, and then something like this happened again in December and January, investors should closely monitor what is happening.

Japan’s monetary policy 

Japan has become a major testing ground for the new "monster" of monetary policy. Negative interest rates were first put into effect on January 29, 2016 in Japan, which was a complete surprise for the market.

Then, banks launched sale of shares, as investor confidence in the world's third largest economy has been undermined. 

The worst thing that all of these risky steps have not led to a desired result: the economy is growing slowly, the country once again is sinking into deflation, and the population and companies do not want to spend money.

The Bank of Japan is likely preparing for additional actions within its policy of negative interest rates.

Further steps will be announced on a meeting on June 16 or on July 29. They are going to be crucial, since consequences of the January introduction of negative interest rates can be repeated.

The US presidential election

The presidential election in the United States only partially relate to the economic situation, as the US role in the world economy or the country's position is unlikely to change in any way.

However, excessive turbulence during this period is almost guaranteed.

The consensus is to defeat Hillary Clinton, but the current trends do not allow speaking about this with conviction.

Clinton could not even become a unique candidate of the Democratic Party: her candidacy rather questionable from the point of view of the voters, and inner-party struggle does not cease.

Republicans, meanwhile, have quickly rallied around Donald Trump. Though his figure is even more questionable from the point of view of the president of the image, recent polls clearly indicate his favor.

It should be noted that the Republicans seem to have Senate controlled quite well, and it can play a role, too.

In the meantime, it is very difficult to name the most likely winner, which means increased nervousness in the market.

source: zerohedge.com






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