Posted on: 08 September 2015
The People's Bank of China sent shockwaves through global
markets from 11 August when it began to devalue the yuan versus the
dollar. It was a move that caused investors to fear that the second
largest economy in the world was slowing much faster than
originally thought (see our other Commentary article: 'China:
currency concerns and implications'). Although the market falls
have been significant, they have the feel of a summer correction,
which is far from unusual due to the low market volumes typically
experienced during the holiday season.
UK large caps were hit hard by the problems in China; companies
listed in the UK tend to be more globally exposed. The market was
down by 6.7%, while the more domestically focused mid- and
small-sized companies were down by 3.1% and 1.1% respectively. At a
sector level, the sell-off was surprisingly well spread, although
stocks and sectors with high emerging market exposure were
particularly badly affected.
In international markets, US equities held up reasonably well,
with shares down 5.5% or 3.9% in sterling terms due to the dollar
rally; which provided its traditional role as a safe haven in times
of trouble. Emerging markets faced the biggest impact from the news
from China, with equities in this area down by 9% in local currency
terms. The Shanghai Composite itself was down by 12% during the
Fixed interest markets performed relatively well in August with
the 10 year UK gilt strengthening slightly. At one point during the
month, the 10 year gilt yield fell to 1.71%, whereas it had been as
high as 2.2% in June. The US Treasury 10 year yield also tracked
back to hit a low of 2%, despite consensus expectations that the
Federal Reserve would begin raising interest rates in September. In
light of the market volatility, there is a possibility that they
will delay this until later in the year.
Although we believe that this month's market moves are a
correction rather than a more serious downturn, it does herald a
new period of volatility that is likely to be longer lasting. This
is because the world's largest economy is moving to tighten
monetary policy at a time when Europe, Japan and now China are
looking to cut interest rates. It is rare for large and developed
economies to deploy such widely different policy measures and the
outcome is therefore uncertain - and uncertainty, as we know,
generally leads to volatility.
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All data has been compiled by
Duncan Lawrie from sources believed to be reliable. Full details of
sources are available on request.
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