What percentage of the International Monetary Fund basket will the Chinese yuan (a.k.a. the renminbi) hold as of October 1, 2016?
Peek of the Week
January 11, 2016
The Markets
The People’s Bank of China (PBOC) started the New Year
with a downward currency adjustment and fireworks followed.
Last week, three distinct issues affected China’s
stock market. First, the PBOC’s devaluation of the yuan (a.k.a. the renminbi), along
with the knowledge the central bank had been spending heavily to prop up its
currency in recent months, led many analysts and investors to the conclusion China’s
economy might not be as robust as official reports indicated, according to the Financial Times.
Not everyone was surprised by
this revelation. During the fourth quarter of 2015, The Conference Board’s working paper entitled Global Growth Projections for The Conference Board Global Economic
Outlook 2016 reported:
“China’s economy grew much slower than the official
estimates suggest in the recent years. During the last five years, our
estimates suggest an average growth of 4.3 percent, which is substantially
lower than the official estimate of 7.8 percent. In 2015, we project China to
see an average growth of 3.7 percent, which is indeed lower than the official
target of 7 percent.”
Second, state-run media made it clear the Chinese
government would not step in to spur growth. Allowing market forces to play out
is a requirement of the reforms international investors have been demanding of
China, according to Barron’s. The
publication suggested Chinese
President Xi Jinping is the victim of a Catch-22. The Chinese government took
steps toward reform and international investors responded by selling shares in
a panic:
“Weaning China off excessive credit, investment and
import-led growth in favor of services means slower growth. Markedly slower, in
fact, than the 6.5 percent Beijing is gunning for this year. But Monday’s 7
percent stock rout shows international investors want it both ways. The rapid
growth, innovation, and disruptive forces that capitalism produces? Yes. The
downturns and volatility that come with it? Not so much.”
The third factor was China’s new and very strict stock
market circuit breakers, which were introduced on January 4. The circuit
breakers were intended to calm overheated markets, but they sparked panicked selling
instead. When the Shanghai Shenzhen CSI 300 Index falls 5 percent, Chinese
stock trading stops for 15 minutes. When the index is down 7 percent, trading
stops for the day. A similar mechanism is employed in U.S. markets, which are
far less volatile. However, trading is not delayed until the Standard & Poor’s
500 index has fallen by 7 percent, and it does not stop until the index is down
by 20 percent. Last week, China’s stock markets closed twice as investors, who
were worried the circuit breakers might kick in, rushed to sell shares.
China suspended its circuit breakers on Thursday, and
the PBOC set the value of the yuan at a higher level. That helped China’s stock
markets, and others around the world, settle. China’s markets gained ground on
Friday, although U.S. markets finished the week lower. Markets may continue to
be jittery next week as “a tsunami of negative psychology driven by China” works
its way through the system, reported Reuters.
Data as of 1/8/16
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard &
Poor's 500 (Domestic Stocks)
|
-6.0%
|
-6.0%
|
-6.8%
|
9.7%
|
8.7%
|
4.1%
|
Dow Jones Global
ex-U.S.
|
-6.1
|
-6.1
|
-11.1
|
-2.6
|
-2.0
|
-0.5
|
10-year Treasury
Note (Yield Only)
|
2.1
|
NA
|
2.3
|
1.9
|
3.3
|
4.4
|
Gold (per ounce)
|
3.7
|
3.7
|
-9.4
|
-12.7
|
-4.2
|
7.4
|
Bloomberg Commodity Index
|
-2.3
|
-2.3
|
-26.0
|
-17.8
|
-13.5
|
-7.6
|
DJ Equity All REIT Total Return Index
|
-3.0
|
-3.0
|
-4.6
|
8.8
|
11.1
|
6.5
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ
Equity All REIT Total Return Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com,
London Bullion Market Association.
Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.
fourth quarter, a look back…
The Federal
Reserve pulled the trigger. At the
December Federal Open Market Committee meeting, the Fed finally acted,
tightening monetary policy by raising the funds rate from 0.25 percent to 0.50
percent. It’s important to remember the Fed doesn’t actually set interest
rates. It takes actions designed to influence financial behaviors. The Fed has
given rates a push, it remains to be seen whether its efforts will bear fruit.
The European Central Bank (ECB) acted, too. Although, its monetary policy moved in a different
direction, offering additional stimulus measures to support European economies.
Investors were enthusiastic when the ECB
announced its intentions; however, markets were underwhelmed when the economic
measures delivered were less stimulative than many had expected.
China’s currency gained status. The International Monetary Fund decided to add the
Chinese yuan (a.k.a. the renminbi) to its Special Drawing Rights basket,
effective October 1, 2016. After the renminbi is added, the U.S. dollar will
comprise 42 percent of the basket, the euro will be 31 percent, the renminbi
will be 11 percent, the Japanese yen will be 8 percent, and the British pound
will also be 8 percent.
Congress tweaked Social Security. The Bipartisan Budget Act of 2015 (BBA) averted a
U.S. default and deferred further discussion of U.S. debt and spending levels
until after 2016’s presidential and congressional elections. It also did away with
two popular social security claiming strategies. The restricted application
strategy was discontinued at the end of 2015, and file and suspend strategies
will be unavailable after May 1, 2016.
Medicare premiums go up, but not for everyone. The BBA also limited increases in Medicare premiums. About
14 percent of Medicare beneficiaries will pay higher premiums in 2016. The new
premium will be $121.80, up from $104.90 in 2015. Original proposals suggested
the premium amount increase to $159.30.
Weekly Focus –
Think About It
“If you do not change
direction, you may end up where you are heading.”
--Lao Tzu, Chinese philosopher
Best
regards,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities
offered through LPL Financial Inc.,
Member
FINRA/SIPC.
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
http://www.ft.com/cms/s/0/f248931e-b4e5-11e5-8358-9a82b43f6b2f.html#axzz3wZlZrvSG (Markets tab, select Equities) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-11-16_FinancialTimes-China_Stock_Market_Closure_Rattles_Global_Assets-Footnote_1.pdf)
http://www.barrons.com/articles/lets-have-a-timeout-on-chinameltdown-1452131218?mod=BOL_hp_highlight_3 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-11-16_Barrons-Lets_Have_a_Time-Out_on_%23ChinaMeltdown-Footnote_3.pdf)
http://www.barrons.com/articles/whats-driving-chinas-stock-market-selloff-1452226798 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-11-16_Barrons-Whats_Driving_Chinas_Stock_Market_Selloff-Footnote_4.pdf)
http://www.ft.com/cms/s/0/43f6507c-9f68-11e5-beba-5e33e2b79e46.html#axzz3uA9sho6V (Markets tabs, select Capital Mkts) (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/01-11-16_FinancialTimes-Fedral_Reserve_Rate_Call-Five_Questions-Footnote_8.pdf)