China selloff spooks global markets

In mid-morning trading the FTSE 100 is offside as London follows China’s lead lower.

PBoC building
Source: Bloomberg
  • China’s selloff is contagious
  • Federal Reserve minutes confirm Chinese fears
  • US rate hike less likely

Stock markets around Europe are suffering because the decline overnight in the Far East has spooked dealers in the West. The great worry is that China will undergo a dramatic drop in the rate of growth, and the knock-on effect to Europe will damage the recovery. It used to be just Australia that would catch a cold when China sneezed, but the Chinese selloff is far more infectious than initially thought.

We won’t see the impact of the Chinese currency devaluation for a few more months, and when it does trickle down it will be painful. The People's Bank of China’s decision to intervene in the currency market has done little to restore confidence in the Chinese stock market, and dealers are dreading that more intervention will be required.

The minutes from the Federal Reserve showed us that the US was worried about turmoil in the Chinese stock market even before the drop in value of the yuan, and now the outlook is even bleaker. The dovish tones from the Fed minutes have accelerated the drop in stocks because China is now even more of a concern.

We are expecting the Dow Jones to open 130 points lower, at 17,220. The US index futures market is extending its losses from last night, and the cautious tones regarding global growth has compounded traders’ fears that China’s economic slowdown could get worse in the short-term.

An interest rate hike in September isn’t off the table, but it is less likely now, and an uncertain macro picture will keep pressure on the US market, even if interest rates stay at record lows next month.  

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