http://www.bbc.com/news/business-34039767
The falling FTSE: How worried should we be?
By Brian Milligan
Personal Finance reporter
The index of the UK's biggest 100 companies, the FTSE 100, has now fallen by 15% since its all-time high on 27 April 2015.
That makes it more serious than a technical correction, normally thought of as a fall of 10%. However, it is not yet a bear market, which is the term used when the index drops 20% or more.
The index of the next biggest companies - the FTSE 250 - is down by 10% since its peak on 3 June.
While the current rout of prices was initially confined to commodity and mining stocks, hit by the slowdown in China, the slump now looks much more widespread.
"We are in the midst of a full-blown growth scare, with China at the epicentre," said a note from analysts at JP Morgan.
So how worried should we be by such events - or is there even a silver lining to this crisis?
How big is the fall?
Monday's fall on the FTSE 100, of between 2% and 3% at the time of writing, is not that big in historical terms.
On 19 October 1987, otherwise known as Black Monday, the index fell by 10.84%. The following day, it fell by a further 12.22%.
On 28 October 1929, at the start of the Wall Street crash, the Dow Jones Industrial Average fell by 12% - and a further 11% the day after.
What is more significant, however, is not the individual one-day falls, but the longer-term declines.
In 1987, for example, Black Monday was followed by a true bear market. By the end of the month, the FTSE 100 had fallen by more than 26%.
During the financial crisis of 2007-08, the FTSE 100 peaked at 6,724 on 12 October 2007, reaching a trough of 3,512 on 3 March 2009 - in all, a drop of 47%.
Bank of England
Interest rates
One immediate impact of the current market turbulence is likely to be a further delay in an interest rate rise.
The Bank of England's Monetary Policy Committee (MPC) primarily looks at inflation expectations when considering any change in rates - but it also looks at wider market confidence as well.
Despite recent suggestions by the governor of the Bank of England that a rise might be expected as soon as the end of 2015, analysts now expect that rise to come considerably later.
In other words, those on variable-rate mortgages can now breathe more easily, and may not have to hurry to switch to a fixed-rate deal.
"I think it's good news for mortgage holders, as it must put back the date of the next rate rise," said mortgage expert Ray Boulger of brokers John Charcol.
On the other hand, the news will inevitably not be so good for savers, who will have to stomach record low savings rates for a while longer.
Investors
How much you should worry about the stock market fall probably depends on your age.
Those in their 50s, approaching retirement, will have much more to be concerned about than younger people. In particular, anyone about to take out a pension, or indeed thinking of cashing in their pension, may have to think again. (See pensions below).
But younger people with pensions, or those investing in the stock market directly, may have little to fear.
Admittedly, some analysts worry that the markets have further to fall.
"Against this backdrop, it would take an investor with nerves of steel to contemplate dipping back into the market at this point," said Michael Hewson, analyst at CMC Markets.
But other experts say that young investors will have plenty of time to make their money back - and indeed could make a lot of money by investing now.
"For younger investors, falls like this are great," says Mark Dampier, investment analyst at Hargreaves Lansdown.
"You're buying the market way cheaper. You should be adding."
retirement fund
Pensions
But you don't need to hold shares directly to be hit by the current slump.
If you are paying into a pension, the chances are that about 70% of it is invested in shares or share-based funds.
While you will now be feeling considerably poorer, it only really matters if you are about to cash in your pension, buy an annuity or set up a drawdown policy.
In that case, your capital will have shrunk, and now may not be the best time to buy a pension.
Mark Dampier is particularly concerned about those who already have a drawdown scheme in place.
Pensioners in drawdown leave their capital invested and "draw down" an income from it. But falling share prices can erode the capital quickly.
"If you are in a drawdown plan, this is definitely the time to check you are not drawing down too much from your capital," he told the BBC.
Those who do are in danger of running out of money before they die.
'Nasty'
On the other hand, many pension pots will not have fallen in value by as much as the FTSE 100.
Smaller companies - particularly those not in mining or commodities - have fared better.
And while many funds typically invest 70% in shares, 30% is often invested in bonds - which may even have gone up in value over the last few months.
Those whose pensions are in so-called lifestyle funds will anyway have seen some of their capital gradually transferred into bonds, as they get nearer retirement age.
The outstanding question, as ever, is whether the slump has further to go, and how long it may take markets to recover.
"This is a nasty correction," said Mark Dampier. "And nobody knows whether there's more to come. That's what makes it scary. But unless this is the death of capitalism, stock markets do recover."
Monday, August 24, 2015
Here’s Why China Devalued Its Currency - Fortune
http://time.com/3992323/china-currency-renminbi-yuan/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+timeblogs%2Fcurious_capitalist+%28TIME%3A+Business%29
Here’s Why China Devalued Its Currency
Scott Cendrowski / Fortune Aug. 11, 2015
China’s central bank devalued the country’s currency, the renminbi, by about 2% against the U.S. dollar on Tuesday. It was the biggest one-day move since the renminbi, or yuan, officially de-pegged from the U.S. dollar in 2005. The yuan maintains a close relationship with the dollar and trades 2% in each direction from a midpoint selected by China. Today, that midpoint went from 6.11 yuan per U.S. dollar to 6.22.
Trump and others may say China is purposely devaluing its currency to help exports. After all, its economy is struggling to hit the government 7% growth target.
But is that what’s really going on?
For the most part, China has recently actually wanted its currency to steadily rise, for political reasons and to keep capital from flowing out of China. China’s domestic and international goals align with a stronger yuan. That helps explain why presidential candidates like Trump haven’t been spouting off about China’s currency management as much of late.
The answer to why China’s government devalued its currency Tuesday probably has more to do with the dynamics of global currency markets than a sudden urge to help Chinese exporters make their goods cheaper on the world market.
First, the yuan is strongly related to the dollar because China still manages the exchange rate within a range against the dollar. When the U.S. dollar rises rapidly against world currencies, like it has in the past year to pull almost even with the euro, the yuan also rises against China’s trading partners’ currencies.
China has wanted the yuan to steadily rise against trade-weighted partners for a while. To keep that appreciation gradual, as the dollar rockets upwards, it may have to devalue a little, says Jonathan Anderson, at Emerging Advisors Group, one of the clearest observers of China’s markets. “But this is not the same as a “competitive devaluation” of the renminbi —and there’s nothing like that on the cards,” he wrote today.
“All China is doing today is managing the pace of trade-weighted renminbi appreciation,” Anderson continued. “Any attempt to gain truly meaningful competitiveness vis-à-vis trading partners would require, say, a 20% to 40% devaluation against the dollar.”
If China had devalued the yuan by, say, 20%, it would clearly be an effort to boost exports for its advantage. A 2% devaluation is different: it simply keeps the yuan a little more in line with trading partners’ currencies, which have lost value relative to the U.S. dollar. (For more on the U.S. dollar’s rise, read this recent Fortune piece.)
As mentioned, China actually wants a stronger currency. As recently as April, it was actively trying to strengthen the yuan, the Wall Street Journal reported. The country’s central bank purchased the yuan in the currency markets and sold U.S. dollar holdings, a move aimed at stemming capital outflows from China as the yuan was falling.
As Chen Long of Gavekal Dragonomics in Hong Kong recently explained, China has twin (and sometimes competing) goals for exchange rates. On the domestic front, it wants to help exporters with a cheaper currency, but it also wants to maintain a strong currency to prevent capital outflows that may weaken the country’s economy further. On the international side, China wants to avoid a trade war with the U.S., which it would have if it severely weakened the currency. It also wants to boost international use of the yuan for political purposes, as China asserts itself more strongly around the world. The country’s recent campaign to have the yuan join the mostly meaningless IMF reserve currency is one example of China desiring a strong currency. In the end, these multiple goals again promote a slightly stronger currency.
China’s central bank said Tuesday’s yuan depreciation was a way to make the country’s financial system more market-oriented. The bank said market spot prices would now determine the daily position, implying that the central bank would step in less to influence it. Over the past few months the yuan-dollar spot price had been lower than the exchange rate, and it became clear the central bank was supporting a stronger yuan.
There are reasons the government doesn’t deserve the benefit of the doubt when it says it’s in the business of market-based approaches. President Xi Jinping’s administration said the same thing before pledging around $800 billion in government money last month to prop up the falling stock market. China’s words and actions don’t always match.
But there are also reasons that today’s devaluation shouldn’t only be viewed through the prism of trade. First, other exporters in Asia, including South Korea and Taiwan, are hurting because of weak demand abroad. Sluggish economies in Europe and the U.S. influence China’s exports. That’s is not all solved by currency devaluations. Second, China can use other mechanisms to boost its economy. Internet rates and bank reserve requirements can still be cut considerably, and analysts expect that to happen. More government spending is already in the works: China’s banks will issue 1 trillion yuan worth of bonds for infrastructure spending, according to recent reports.
For now, it’s too early to say China is starting a currency war, even if that may be the West’s first inclination.
Here’s Why China Devalued Its Currency
Scott Cendrowski / Fortune Aug. 11, 2015
China’s central bank devalued the country’s currency, the renminbi, by about 2% against the U.S. dollar on Tuesday. It was the biggest one-day move since the renminbi, or yuan, officially de-pegged from the U.S. dollar in 2005. The yuan maintains a close relationship with the dollar and trades 2% in each direction from a midpoint selected by China. Today, that midpoint went from 6.11 yuan per U.S. dollar to 6.22.
Trump and others may say China is purposely devaluing its currency to help exports. After all, its economy is struggling to hit the government 7% growth target.
But is that what’s really going on?
For the most part, China has recently actually wanted its currency to steadily rise, for political reasons and to keep capital from flowing out of China. China’s domestic and international goals align with a stronger yuan. That helps explain why presidential candidates like Trump haven’t been spouting off about China’s currency management as much of late.
The answer to why China’s government devalued its currency Tuesday probably has more to do with the dynamics of global currency markets than a sudden urge to help Chinese exporters make their goods cheaper on the world market.
First, the yuan is strongly related to the dollar because China still manages the exchange rate within a range against the dollar. When the U.S. dollar rises rapidly against world currencies, like it has in the past year to pull almost even with the euro, the yuan also rises against China’s trading partners’ currencies.
China has wanted the yuan to steadily rise against trade-weighted partners for a while. To keep that appreciation gradual, as the dollar rockets upwards, it may have to devalue a little, says Jonathan Anderson, at Emerging Advisors Group, one of the clearest observers of China’s markets. “But this is not the same as a “competitive devaluation” of the renminbi —and there’s nothing like that on the cards,” he wrote today.
“All China is doing today is managing the pace of trade-weighted renminbi appreciation,” Anderson continued. “Any attempt to gain truly meaningful competitiveness vis-à-vis trading partners would require, say, a 20% to 40% devaluation against the dollar.”
If China had devalued the yuan by, say, 20%, it would clearly be an effort to boost exports for its advantage. A 2% devaluation is different: it simply keeps the yuan a little more in line with trading partners’ currencies, which have lost value relative to the U.S. dollar. (For more on the U.S. dollar’s rise, read this recent Fortune piece.)
As mentioned, China actually wants a stronger currency. As recently as April, it was actively trying to strengthen the yuan, the Wall Street Journal reported. The country’s central bank purchased the yuan in the currency markets and sold U.S. dollar holdings, a move aimed at stemming capital outflows from China as the yuan was falling.
As Chen Long of Gavekal Dragonomics in Hong Kong recently explained, China has twin (and sometimes competing) goals for exchange rates. On the domestic front, it wants to help exporters with a cheaper currency, but it also wants to maintain a strong currency to prevent capital outflows that may weaken the country’s economy further. On the international side, China wants to avoid a trade war with the U.S., which it would have if it severely weakened the currency. It also wants to boost international use of the yuan for political purposes, as China asserts itself more strongly around the world. The country’s recent campaign to have the yuan join the mostly meaningless IMF reserve currency is one example of China desiring a strong currency. In the end, these multiple goals again promote a slightly stronger currency.
China’s central bank said Tuesday’s yuan depreciation was a way to make the country’s financial system more market-oriented. The bank said market spot prices would now determine the daily position, implying that the central bank would step in less to influence it. Over the past few months the yuan-dollar spot price had been lower than the exchange rate, and it became clear the central bank was supporting a stronger yuan.
There are reasons the government doesn’t deserve the benefit of the doubt when it says it’s in the business of market-based approaches. President Xi Jinping’s administration said the same thing before pledging around $800 billion in government money last month to prop up the falling stock market. China’s words and actions don’t always match.
But there are also reasons that today’s devaluation shouldn’t only be viewed through the prism of trade. First, other exporters in Asia, including South Korea and Taiwan, are hurting because of weak demand abroad. Sluggish economies in Europe and the U.S. influence China’s exports. That’s is not all solved by currency devaluations. Second, China can use other mechanisms to boost its economy. Internet rates and bank reserve requirements can still be cut considerably, and analysts expect that to happen. More government spending is already in the works: China’s banks will issue 1 trillion yuan worth of bonds for infrastructure spending, according to recent reports.
For now, it’s too early to say China is starting a currency war, even if that may be the West’s first inclination.
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