U.S. equities are trying to catch a bid, but we are not yet convinced that it will stick.
- As highlighted in the next insights, expectations for a September rate hike have collapsed. A ‘delayed’ rate hike will be justified by policymakers by the worsening in financial conditions and “international events”. But that does not materially change the thinking at the FOMC, namely that policymakers are keen to move off the lower bound at the first opportunity, so long as domestic growth holds. With market expectations of rate hikes now already very low for September, it will be hard for the Fed to engineer a “positive surprise” for markets.
- The fundamental problem facing the world economy is deficient final domestic demand. Price adjustments in commodity markets, especially oil, should eventually boost final demand, but the response this cycle has so far been muted and slow. A cloud is still hanging over the profit cycle.
- It has become clear that investors are assigning a much higher risk premium to EM/China risk assets: yesterday’s cut in the Chinese reserve requirement ratio failed to even temporarily halt the slide in Chinese equity prices. The timeline for when/how/if Chinese policymakers deliver sufficient stimulus is unknown. In addition, there is no way to assess the magnitude of capital flows out of and into China. These uncertainties imply that further market turmoil lies ahead.