Saturday, August 29, 2015

Eyeing the present economic situation

Here is a broad summary:
Why the sell-off
·      While China’s growth story and plunging commodity prices may have been at the back of investors’ minds, China surprised markets in early August when it moved to devalue its yuan.
·      This fed fears that China was slowing faster than expected and triggered a vicious cycle of capital outflows.
·      The capital flight put downward pressure on emerging market (EM) currencies, resulting in weaker import demand and growth and spurring further outflows.
·      Investors are now worried that the global economy could plunge into a recession, as EM accounts for about half of global GDP.
·      This fear has caused equities to be sold off, led by EM and Asia and spreading to developed markets like the U.S., Europe and Japan.