International News (Issue 381) – 11 December 2015

Man there was a lot this week.

In the US, the stronger November payrolls figure effectively confirmed what we all expect – that the US Federal Reserve will raise interest rates for the first time in over 9 years next Thursday night.

Though this is entirely expected, it continues to occupy the minds of investors since this is such a sea-change in policy. On the reports I have seen, equity markets on average tend to fall 5-7% after the first rate rise, but then recover any lost ground pretty quickly.

The key to market performance will likely be the pace at which the Federal Reserve raise rates in 2016. The market is currently pricing in a move to 0.75%, but the economists I watch think rates could end up at 1.25%.

In addition to the uncertainty on US rate trajectory, the other big issue being discussed by global equity strategists is the peak in US corporate profit margins. This is perhaps a bigger issue for markets to contend with, since earnings delivery is absolutely vital to underpinning the dramatic re-rating of global equities to have occurred during these multiple periods of Quantitative Easing.

Again, the jury is out here, but all in all, what I am reading seems to point to another year of very modest equity returns (the S&P500 is currently flat on the year to date).

The weakening Chinese Yuan is another major topic of conversation, since weakness here is seen as a deflationary blanket for the global economy.

The CNY has fallen back to its weakest point in 5 years in the last day or two, and is now back at the level seen in August which precipitated a major ‘risk-off’ event in global asset markets.

The concern with a weaker CNY is simply that if China’s currency is weakening it is making them more competitive, and hence ‘exporting’ that price deflation/competitiveness to the rest of the world, precisely at a time when we are desperate to see the green shoots of inflation.

Again, it’s a worrying factor we should be all aware of.

As a matter of interest, and many of you will have seen this in the press this week, China issued its worst ever pollution alert for Beijing this week.

Schools were closed and driving restrictions were put in place.

Forgetting the human issue which is obvious, think about what these constant pollution warnings are doing to the functioning of both the economy and society, when workers cannot get to work because they either cannot drive, or because their kids aren’t allowed in school or childcare and hence parents must stay at home to look after them.

The pollution issue in China, and Beijing in particular is becoming an even greater issue, and will surely create more headaches for China’s economy in 2016.

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