China Volatility Increases

Daily Analysis - 24/08/2015

Last Week

Measures intended to prevent a further collapse in Chinese stocks were largely considered a letdown after further interventions failed to keep asset value elevated as concerns widen about the future of the Chinese economy and its perceived strength.

The Week Ahead

After previously weakening the Yuan in an event that sparked another round of turmoil in global currencies, the People’s Bank of China surprising moved to revalue the Yuan higher, with the USDCNH experiencing one of the biggest gains in months. Efforts to prop up stock market were not considered successful after the Shanghai Composite took out a major technical level and reentered bear market territory along with a host of other regional indices. Aside from the malaise in Asia, the FOMC Meeting Minutes showed that September liftoff is increasingly unlikely due to the worsening inflation outlook. Pressure on energy prices is keeping consumer prices subdued and preventing the Federal Reserve from acting quicker to normalize interest rate policies amid the challenging external picture. US housing data remains mixed but has seen some of the indicators substantially outperform analyst estimates in a sign of growing confidence in the economy. Meanwhile, the Greeks secured a third bailout package from creditors and managed to unlock funds ahead of crucial ECB repayment that was made just in time. The funds also pave the way for bank recapitalization and hopefully an eventual lifting of capital controls.

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The coming sessions will be dominated by gross domestic product numbers from both Europe and the United States. Major Euro Area economies including Germany and Spain are set to report on their second quarter GDP numbers with German GDP expected to expand at 0.40% quarterly and at a 1.60% annualized pace. Aside from the Euro Area, Switzerland and the United Kingdom will also be reporting on GDP with the former likely to see the economy contract as the stronger Swiss Franc impacts the export sector. The United States is set to release its revised second quarter GDP numbers later in the week, with expectations that the figure will accelerate to 3.10% from 2.30% recorded during the preliminary figure. Aside from GDP, the United States will also see other relevant economic data including durable goods orders and additional housing data. Core durable goods are forecast to rise but come disappoint, following the trend of the last few months. Housing data including the Case-Shiller home price index and new home sales are likely to stay in-line with prevailing trends in the sector.

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