Thursday’s Market Rout: Is it 2008 All Over Again?By Lex Yaranu | Monday, August 24th, 2015
Thursday August 20, 2015 saw the biggest stock market rout in more than 18 months, as traders digested the worsening commodity price slump and began to rethink widely held views of an imminent Fed interest rate hike in September.
The meltdown fears have arisen as prices of emerging market currencies and commodities slump in the last two weeks. The South African Rand (ZAR) for instance, has crossed the 13.0000 mark against the US Dollar, a level it has not attained since December 2001. Other emerging market currencies such as the Turkish lira, Brazilian Real, Malaysian Ringgit and Thai Baht have all lost at least 8 percent since July. The Russian Ruble is down almost 17 percent as the country struggles under crippling sanctions. A rise in interest rates in the US will give higher returns on investments there, leading to capital flight from emerging markets to the US.
Crude oil prices are at 6-year lows at just above $40 a barrel, with Citigroup predicting a $32 per barrel price in the not-too-distant future. The gainer in all of this is gold and bonds as investors have started to assume a risk-off sentiment.
A lot of the growing contagion has to do with China. Last week saw a shock devaluation of the Chinese Yuan by the People’s Bank of China, and the Chinese stock markets have seen wild swings in the last two months, with the government having to intervene to prevent total market collapse. These recent data have not been encouraging and have cast serious doubt on whether the central government’s GDP forecast of 7% for 2015 is achievable. Commodity prices are closely linked to Chinese data, as the country which accounts for 40% of the world’s manufacturing activity imports many commodity raw materials to power its industries.
The big questions that will be answered in the coming days are:
- Will the Feds go ahead to raise rates sometime later this year?
- How will China’s economy end the year?
- More importantly, will the markets start getting spooked as we head into September and October which are months that have seen the worst performances in stocks in recent years?
Whatever the case, binary options traders will have their hands full as there will be plenty of trading opportunities to come.Published in News & Analysis