market views

The Summer of 2015: It Was Hardly a Vacation

Frank Trotter | October 1, 2015 3 MIN READ

While European and North American activity continue to be the top influencers on our economic world, China, as well as other emerging and developing countries, are making their mark, too. Some good, some not so good. Yet, as we entered the summer of 2015, our world economic outlook looked a lot sunnier than it does today.

Spring Foreshadowed a Rosier Time

Back in May, we were feeling a lot better about things economically.

The markets were performing admirably. The Dow had advanced 1.05% through the end of the month. European stocks were up 16.40%. The U.S. 10-Year Treasury was steady year-to-date. And Chinese stocks had risen 16.18%.

And the good vibes continued, as the Fed talked of a possible summertime rise in short term policy rates, the latest round of Quantitative easing had ended, bond trading had returned to the private marketplace, and yields looked to drift upward.

But then the lug nuts started to loosen.

Enter the Summer of Global Showers

First up on the list: Greece. This feels like very old news now, but the very public debate about Greece’s inability to service its debt established the nervous tone for the summer.

Puerto Rico was up next with what seemed like a sideshow. “Sorry, we can not make our debt payments,” they said.

In August, it was China’s turn to steal the headlines. The spiral for China started with the IMF’s rejection of their bid to add the Chinese renminbi to the SDR basket. The IMF indicated that a number of items relating to market liquidity and financial disclosure were lacking.

After the rejection, China appeared to reduce the value of their currency to allow for more exports to help support an economy in decline. Additional currency moves, Central Bank policy rate reductions, and a string of stock market panics followed and touched off circuit breakers all over the world.

Clearly, this was not a rosy summer for the markets.

Where Do We Go from Here?

Global markets remain unsteady, demand remains light, and incomes are unevenly distributed. A Fed rate hike may well occur (possibly even by the publish date of this post), but don’t expect the market to react with strong enthusiasm to the news.

Sometimes economic indicators like those that are released and make the news diverge from prices the free market assigns to shares, commodities, and bonds. Currently, the official indicators appear to show an expanding U.S. economy that’s not only well out of recession, but expanding briskly.

Market prices, however, are telling us just the opposite. Over the past year or so, the costs of industrial inputs like copper, oil, zinc and others have all fallen, and in some cases significantly. Meanwhile, stock and bond prices continue to be highly volatile. And while the market won’t always accurately predict the future, it does reflect what participants think. Price discovery–pretty much everywhere but in restricted markets like China–occurs between willing buyers and sellers at an agreed upon price.

Looking back to our list of good news from May, since then the Dow has fallen 8%, China’s Hang Send has declined over 20%, and European stocks have come down 9.6%. Not exactly a rosy return.

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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