AMERIPRISE FINANCIAL, INC.
New Questions Emerge About the Strength of the Global Economy
08/18/2015 | David Joy
Generally positive reports from the U.S. last week were overshadowed by international developments, which raised new questions about the strength of the global economy. At home, both retail sales and industrial production reports for July rebounded from the prior month, suggesting the U. S. economy began the third quarter on a positive note. These indicators followed the solid July employment report from the previous week. Stocks responded positively, as the S&P 500 climbed 0.7 percent on the week. The gains might have been stronger if not for the heightened concerns about the pace of economic activity in China and the unanticipated devaluation of its currency.
Despite China's official report of 7.0 percent growth year-over-year through the second quarter, many observers believe the true pace of growth to be less, with some suggesting it is significantly less. Whatever the real rate of growth is, the government has recognized the slowdown and has been attempting to stimulate the economy through a series of interest rate cuts and easing of bank lending restrictions dating back to November of last year. It has also attempted, with some success, to stabilize a precipitous decline in its stock market, which trimmed roughly a third of its value between mid-June and early July.
Although the official rationale for last week's devaluation of the yuan was to further satisfy the requirements of the International Monetary Fund for its inclusion in the special drawing rights reserve currency basket, it's also consistent with prior stimulative initiatives to make China's exports more competitive. Export growth had declined 8.3 percent year-over-year in July. But the move to devalue came unexpectedly and caused widespread concern that conditions in China were deteriorating faster than believed and that expectations for global growth, although modest, might still be overly optimistic.
Why People are Keeping a Close eye on the Situation in China
China is now the world's second largest economy and accounts for roughly one-quarter of global growth. It is also the largest trading partner of a number of countries in the Pacific Rim. Stocks in Australia dropped 2.2 percent last week, while the Japanese Nikkei index fell 1.0 percent and Korea lost 1.3 percent. The Eurozone is also more highly leveraged to China than the U.S., which was reflected in the 4.0 percent decline in the EuroStoxx 50 index, after the euro appreciated sharply versus the yuan.
The exchange value of the yuan stabilized after a few days under the new price setting regime (after the central bank intervened). However, further weakness cannot be ruled out, leaving investors to wonder whether the full potential impact of China's decision to stimulate its own economy at the expense of others can yet be quantified.
Despite the better economic news from the U.S. last week, no doubt the Federal Reserve will take notice as it considers when to raise interest rates for the first time. Investors certainly took notice as the odds of that first rate hike coming in September were reduced to below 50 percent.
Greece Reaches a Bailout Deal
Another major international development last week, but one which paled in comparison to the significance of developments in China, was the announced agreement of a bailout deal for Greece. The deal had become something of a foregone conclusion, but the details of the new plan and parliamentary approval remained to be completed.
On Friday, Eurozone finance ministers approved the new plan despite uncertainty over the role of the IMF, which insists that Greece's debt is unsustainable and requires some form of relief, which is not part of the new plan. Country parliaments must still approve the plan, with the most important and contentious vote coming this Wednesday in Germany. In addition to the widely anticipated approval of the new deal, the relative lack of market response in comparison to the news out of China is readily explained by the relative size of these two economies. According to the World Bank, 2014 GDP in China was $10.36 trillion, while in Greece it was $0.24 billion, or just 2.3 percent as large.
Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The S&P/ASX 200 Index measures the performance of the 200 largest stocks present on the Australian Stock Exchange. The index takes into account float-adjusted market capitalization.
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
The KOSPI 200 is an index tracking 200 large companies that trade on the Korea Exchange.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
08/18/2015 | David Joy
Generally positive reports from the U.S. last week were overshadowed by international developments, which raised new questions about the strength of the global economy. At home, both retail sales and industrial production reports for July rebounded from the prior month, suggesting the U. S. economy began the third quarter on a positive note. These indicators followed the solid July employment report from the previous week. Stocks responded positively, as the S&P 500 climbed 0.7 percent on the week. The gains might have been stronger if not for the heightened concerns about the pace of economic activity in China and the unanticipated devaluation of its currency.
Despite China's official report of 7.0 percent growth year-over-year through the second quarter, many observers believe the true pace of growth to be less, with some suggesting it is significantly less. Whatever the real rate of growth is, the government has recognized the slowdown and has been attempting to stimulate the economy through a series of interest rate cuts and easing of bank lending restrictions dating back to November of last year. It has also attempted, with some success, to stabilize a precipitous decline in its stock market, which trimmed roughly a third of its value between mid-June and early July.
Although the official rationale for last week's devaluation of the yuan was to further satisfy the requirements of the International Monetary Fund for its inclusion in the special drawing rights reserve currency basket, it's also consistent with prior stimulative initiatives to make China's exports more competitive. Export growth had declined 8.3 percent year-over-year in July. But the move to devalue came unexpectedly and caused widespread concern that conditions in China were deteriorating faster than believed and that expectations for global growth, although modest, might still be overly optimistic.
Why People are Keeping a Close eye on the Situation in China
China is now the world's second largest economy and accounts for roughly one-quarter of global growth. It is also the largest trading partner of a number of countries in the Pacific Rim. Stocks in Australia dropped 2.2 percent last week, while the Japanese Nikkei index fell 1.0 percent and Korea lost 1.3 percent. The Eurozone is also more highly leveraged to China than the U.S., which was reflected in the 4.0 percent decline in the EuroStoxx 50 index, after the euro appreciated sharply versus the yuan.
The exchange value of the yuan stabilized after a few days under the new price setting regime (after the central bank intervened). However, further weakness cannot be ruled out, leaving investors to wonder whether the full potential impact of China's decision to stimulate its own economy at the expense of others can yet be quantified.
Despite the better economic news from the U.S. last week, no doubt the Federal Reserve will take notice as it considers when to raise interest rates for the first time. Investors certainly took notice as the odds of that first rate hike coming in September were reduced to below 50 percent.
Greece Reaches a Bailout Deal
Another major international development last week, but one which paled in comparison to the significance of developments in China, was the announced agreement of a bailout deal for Greece. The deal had become something of a foregone conclusion, but the details of the new plan and parliamentary approval remained to be completed.
On Friday, Eurozone finance ministers approved the new plan despite uncertainty over the role of the IMF, which insists that Greece's debt is unsustainable and requires some form of relief, which is not part of the new plan. Country parliaments must still approve the plan, with the most important and contentious vote coming this Wednesday in Germany. In addition to the widely anticipated approval of the new deal, the relative lack of market response in comparison to the news out of China is readily explained by the relative size of these two economies. According to the World Bank, 2014 GDP in China was $10.36 trillion, while in Greece it was $0.24 billion, or just 2.3 percent as large.
Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The S&P/ASX 200 Index measures the performance of the 200 largest stocks present on the Australian Stock Exchange. The index takes into account float-adjusted market capitalization.
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
The KOSPI 200 is an index tracking 200 large companies that trade on the Korea Exchange.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
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