Fears over a slowdown in Chinese growth sparked an aggressive sell-off and global markets fell sharply at the beginning of last week. However, a surprisingly strong rally towards the end of the week saw markets recover some of their losses.
Uncertainty around the next Fed interest rate move compounded confusion in the market, and will continue to be a driving force in market movements in the coming weeks.
Key points about the recent market movements:
It is a “Made in China” event – the sell-off seems to be entirely attributed to fears of a sudden Chinese slowdown.
Worries about the economic fallout from the slump in Chinese equities are overdone. The share market is not the real economy.
Whilst economic data shows slower growth, we do not think it is weak enough to justify fears of a “hard landing” in China
Worries about new crises in emerging markets are exaggerated – this is 2015, not 1997.
Lower commodity prices for longer would actually be a net positive for the global economy - including China.
Unsurprisingly, market volatility almost doubled on the back of last week’s movements.  It would be unusual for such volatility to wash out of the markets very quickly, and we should expect a period of heightened volatility in the coming months. Investors will need to remain patient.
Before last week, recent noises from the Fed indicated there may be a rate hike in September. However, the recent panic, and some slightly dovish comments from Fed members, led some investors to conclude that they will be less inclined to tighten monetary policy in September.
The market is however still predicting that there is a chance of a September move, with 2 weeks of economic data to analyse – however due to the recent panic, and a fall in core inflation, the case appears to be weaker than 2 weeks ago.
The ‘catch 22’ is that uncertainty around the FED’s decision is adding to the volatility in the market which could delay the FED decision – which adds to the uncertainty in the market – and so it goes.
In Australia, we will look to the release of the GDP figures for the second quarter on Wednesday. We expect an okay rise in overall GDP, a further sign that Australia is coping well with the end of the mining boom and slump in commodity prices, contrary to what you would expect from watching and reading the press.