These moves are aimed at draining liquidity from the banking system and taming growth in lending. The China stock market blowout was a shocker, but that same index fell 6.5% on January 31 and has been ricocheting up and down in 3 % swings all year. Timing is everything when it comes to global market psychology-and the Chinese stock declines came just as fresh worries were surfacing about the health of the US and Japanese economies. After the troubles in China, and before US markets opened up, came word of dismal durables goods data in the US. Reports said former US Fed chairman Alan Greenspan had suggested a recession was possible in the US in '07. The result was a 'perfect storm' of bad news that unnerved investors in the US. The declines in the US boomeranged back to Asia and Europe. Isn't the stock market sell-off going to hit the Chinese economy, and thus global growth? That's unlikely since most Chinese families have their money stashed away in bank deposits, not stocks. The investor class is growing rapidly, but the market shock will not have a huge impact on the economy. China remains on course to grow 10% this year and may overtake Germany as world's third biggest economy. One concern is the Chinese government goes too far to stamp out asset bubbles in the stock and realty markets, and restrictions on lending overshoot and take a bite out of the economy.
What's this yen carry trade business all about?
Since the late 1990s, the BoJ has kept short -term rates near zero and raised them slightly to 0.5% in February. That has been an invitation for hedge funds and institutional traders to raise yen funds cheaply and buy better performing bonds and 'other investments in emerging markets and elsewhere yielding 4-6%, or more. This is more worrisome than the stock market rout in China, given the linkages between the yen carry trade and the bond markets in rich world economies and emerging-market investments. Global investors have been unwinding their yen-financed bets and that has added instability. The yen has appreciated 3 % against the dollar since the market trouble started as investors are selling off bonds and stocks and paying back their yen loans. This process could feed on itself, because as the yen appreciates it, takes more foreign currency to pay back those loans. Developing Asian economies like Indonesia and the Philippines are vulnerable to I the unwinding trend. They have "fairly high levels of external and public debt and among the lowest ‘forex reserves' in the region. Thailand could also feel some pain if the yen really spikes. So, could the export -driven Japanese economy.
What will mitigate the market risks from China and Japan?
A few months of less volatile trading will help. China's economic fundamentals are robust. An orderly correction that cools off exchanges in China is welcome. Assuming Japanese interest rates continue to rise; investors could reverse-engineer their yen-fuelled trades in a less treacherous environment and the impact on emerging bond and stock markets will be more benign. Here's to a little market serenity for the rest of '07.
What's this yen carry trade business all about?
Since the late 1990s, the BoJ has kept short -term rates near zero and raised them slightly to 0.5% in February. That has been an invitation for hedge funds and institutional traders to raise yen funds cheaply and buy better performing bonds and 'other investments in emerging markets and elsewhere yielding 4-6%, or more. This is more worrisome than the stock market rout in China, given the linkages between the yen carry trade and the bond markets in rich world economies and emerging-market investments. Global investors have been unwinding their yen-financed bets and that has added instability. The yen has appreciated 3 % against the dollar since the market trouble started as investors are selling off bonds and stocks and paying back their yen loans. This process could feed on itself, because as the yen appreciates it, takes more foreign currency to pay back those loans. Developing Asian economies like Indonesia and the Philippines are vulnerable to I the unwinding trend. They have "fairly high levels of external and public debt and among the lowest ‘forex reserves' in the region. Thailand could also feel some pain if the yen really spikes. So, could the export -driven Japanese economy.
What will mitigate the market risks from China and Japan?
A few months of less volatile trading will help. China's economic fundamentals are robust. An orderly correction that cools off exchanges in China is welcome. Assuming Japanese interest rates continue to rise; investors could reverse-engineer their yen-fuelled trades in a less treacherous environment and the impact on emerging bond and stock markets will be more benign. Here's to a little market serenity for the rest of '07.
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