The unexpected devaluation of the Chinese yuan caused a major upset on the global financial markets last week. Greece’s new deal with its creditors went largely unnoticed as a result, while the corporate sector also had some big news stories.
However, we feel that the upset on the securities markets is somewhat exaggerated
Ben Steinebach Head of Investment Strategy
Last week Tuesday the People’s Bank of China decided to cut the value of the yuan by almost 2% relative to the basket of currencies to which it is pegged. This represents the maximum daily latitude that the central bank permits itself. The immediate result was upheaval on the global securities markets. The move was viewed as a response to the much more rapid downturn of the Chinese economy than had been previously supposed. Shortly before, it had emerged that exports in July were down 8.3% relative to a year before, while the sentiment among purchasing managers – a defining indicator – was also significantly more negative than in previous months. This combination of factors would reduce export opportunities for US and European companies, it was thought. The peg to the basket of foreign currencies – and especially the strongly appreciated dollar – is rendering Chinese companies less competitive, both in the international arena and on the domestic Chinese market. Viewed from this angle the move is understandable, as is the gradual further depreciation of the yuan in the days that followed.
However, we feel that the upset on the securities markets is somewhat exaggerated. Ultimately the yuan fell by no more than 4.5% last week, a minor dip compared with its appreciation over the past year (in the wake of the US dollar). Moreover, the intention of the Chinese authorities is presumably to adjust the yuan to more closely reflect its actual value, and to show the international community that the currency is ready for inclusion in the Special Drawing Rights – the IMF’s basket of key currencies – next year. We do not share the opinion aired by some analysts that the move is the opening salvo of a new currency war, in which a number of countries will try to devalue their currencies. This would require a much greater and much more rapid devaluation and would increase the risk of instability and capital outflow. We expect that the Chinese authorities are instead focusing their efforts on slowing the growth rate of the Chinese economy in a controlled manner and will help the country’s economy avoid a hard landing (a rapid and substantial slowdown of the growth rate).
Imtech’s protracted difficulties end in bankruptcy
The new deal with Greece has opened up the way for a third bailout package, although some pitfalls yet remain. The developments surrounding Imtech and the earnings of Aegon and Delta Lloyd dominated the Dutch securities market. Despite the new deal between the Greek government and the European Union, the IMF and the EMF relief fund, it is by no means certain whether the necessary programme of around EUR 85 billion will be made available. Both Greece’s parliament and the parliaments of several eurozone countries still need to approve the deal, and an underperforming economy (relative to the assumptions on which the deal is based) might necessitate further austerity measures. Relief for the untenable government debt appears unavoidable, and this might be too much for many European countries. However, the financial markets are overwhelmingly ignoring these developments, being preoccupied with the events in China discussed above. Those events have forced global stock prices down, cancelling out the earlier gains, especially in Europe. On the Dutch market Imtech’s stock was in the headlines. Following the fraud in Germany and Poland and a series of major losses, last week’s bankruptcy brought an end (at least for the present) to a tale that has dragged on for two and a half years. Two of the company’s divisions – Imtech Marine and Imtech Nordic – might be relaunched, saving 7,300 out of 22,000 jobs (in the Netherlands: 1,300 out of 4,500).
Insurance companies Delta Lloyd and Aegon published their Q2 earnings last week. Despite not being terribly poor, particularly at Aegon, the stock of both companies fell sharply: Aegon lost 7.5% on Thursday and Delta Lloyd plummeted 27% within two days. The companies’ capital buffers were much poorer than had been foreseen. The reason why this is so important is that from 2016 forward insurers need to satisfy the Solvency II ratios to achieve a lower risk profile. Even though both Aegon and Delta Lloyd prefer to use their own calculation models, the ratios nevertheless fell short of the targets. Delta Lloyd is also involved in a dispute with Dutch central bank DNB, in which the court ruled against the company last week. Having shortly been above 500 points on Monday, before the Chinese yuan was devaluated, the AEX fell to 477 points, 4% down from the Friday before. By Friday morning the index had recovered slightly and was on nearly 478 points.
Attention shifts to macroeconomic news
This week the financial markets will shift their focus to the annual conference of monetary policymakers and academics in Jackson Hole in the US. With the earnings season almost over, attention will also move to macroeconomic news. Jackson Hole is a valley in the west of the state of Wyoming in the US. Surrounded by sublime nature, the most important conference about monetary affairs is held every year in August, drawing central bankers, prominent financiers and monetary scientists. It is possible that representatives of the Federal Reserve will announce the timing of the first US interest rate hike in nine years and timetable for subsequent rate hikes. Undoubtedly the conference will include discussions of new information about the present monetary situation in the world.
The news about corporate earnings is gradually slowing down. The principal companies scheduled to present their earnings this week are TKH (Twentse Kabel), Ahold, Boskalis, BAM, Vastned Retail and Vopak in the Netherlands, and Wal-Mart and Home Depot in the US. With the flood slowing to a trickle, the focus will shift to macro news. July’s inflation in the United Kingdom and the United States will be announced, as well as data about the US housing market. The US Federal Reserve will publish the minutes of its July policy meeting, and the policy committee of Japan’s central bank will meet to determine the country’s monetary policy. Other news will include the Philadelphia Fed Index, the first indicator of the US economy – in this case the Philadelphia region – in August. The most important data from Europe are consumer confidence in Europe and in Germany, Belgium and the Netherlands, Europe’s construction output and consumer spending in the Netherlands.