Fed
fears and China credit crunch concerns send jitters through markets
FTSE
100 falls to just above 6000 from all-time highs last month, while
Dow Jones index opens 200 points down in New York
24
June, 2013
Fears
that the Federal Reserve is preparing to remove its stimulus from the
US economy coupled with anxiety that China is being gripped by its
own credit crunch have sent jitters through global stock and bond
markets.
The
rout hit yields on UK government bonds which hit their highest level
since October 2011 in what analysts said was one of the most rapid
moves ever witnessed on the market. Yields, which move inversely to
price, on 10-year gilts have now risen a full percentage point to
edge towards 2.6% in just two months, a rapid pace of change in the
potential cost of government borrowing that could in turn increase
the price at which companies and households borrow.
The
FTSE 100, which last month was testing all-time highs, lost another
70 points to sit just above 6000 – a key level it only moved
through at the start of 2013 – while the Dow Jones Industrial
Average in the US suffered a 200-point loss in the first half hour of
trading. Commodity prices, such as copper, were also lower.
Yields
on US government bonds, known as Treasuries, also hit two-year highs
as investors digested recent remarks by the Fed chairman, Ben
Bernanke, that he might begin to slow down the central bank's $85bn
(£55.1bn) monthly purchases of bonds which are being used to
simulate the economy.
Governments
in the eurozone, particularly the fragile economies of Spain and
Italy, also faced their highest borrowing costs since May as yields
rose.
Chinese
stock markets dropped more than 5%, the biggest fall in three years
to reach their lowest close in more than four years, after the
People's Bank of China (PBoC) – the central bank – appeared to
suggest it would not step in to prevent a rise in the rates at which
banks borrow from each other.
Analysts
at Nomura said that "investors remain concerned over tight
liquidity conditions in the banking system" in China after the
PBoC said it would "contain financial risks with more solid
actions" and "fine-tune policy when necessary".
The
rates which banks borrow from each other in China have jumped to
close to 10% and to as much as 25% for some banks – from just 3% a
month ago – raising concerns about the impact of lending by
non-banks in China, known as shadow banks.
Michael
Hewson, senior market analyst at CMC Markets, said: "Fears of a
continued cash squeeze in the Chinese banking system has seen
European markets continue their soft tone on fears that a dislocation
in the banking system will cause further downward revisions in
forward expectations for growth over the coming months".
Hewson
noted that the warning at the weekend by the Bank for International
Settlements, the international central bank organisation, that more
stimulus could actually harm fragile economies had also ratted
markets. Stephen Cecchetti, head of the BIS monetary and economic
department, warned on Sunday: "Unfortunately, central banks
cannot do more without compounding the risks they have already
created. Monetary stimulus alone cannot put economies on a path to
robust, self-sustaining growth, because the roots of the problem
preventing such growth are not monetary."
But
a senior US central banker attempted to fight back against the market
reaction saying that the Fed could not be broken in its resolve in
easing back from monetary stimulus in the way that the UK had been
forced out of the exchange rate mechanism in 1992 by speculative
attacks by George Soros. "But I do believe that big money does
organise itself somewhat like feral hogs. If they detect a weakness
or a bad scent, they'll go after it," Richard Fisher, president
of the Dallas Fed, told the Financial Times. The Fed had not even
started to cut back its purchases of bonds, Fisher said. "I
don't want to go from Wild Turkey to 'Cold Turkey' overnight,"
said Fisher.
John
Higgins, chief markets economist at Capital Economics, said the
potential removal for stimulus by the Fed was the main cause of the
upheaval in bond markets but said, though, that a "bloodbath"
should be averted. Even if US Treasury bond yields rose to 3.5% by
the end of the year – from around 2.5% now – it would be low by
historical standards, Higgins said.
In
China, concerns about a rapid expansion in lending have dogged
Beijing's economic management as consumers seek to maintain their
living standards by borrowing cash from these local finance companies
rather than main stream banks, although much of the lending can
ultimately be traced back to the banking sector. Deutsche Bank has
estimated that the among credit extended by non-banks could account
for as much as 40% of Chinese GDP.
Capital
Economics' China analyst, Mark Williams, said investors were
factoring in lower growth as the credit squeeze takes effect while
the Nomura analysts said the liquidity squeeze was the first real
test for China's new leaders, in office for just three months.
"If
the new leaders maintain their current approach, we believe it will
add downside risk to growth in 2013 but in our opinion this would
help reduce systemic financial risks, supporting long-term
sustainable growth," the Nomura analysts said.
China's
economy has already slowed in recent months: manufacturing contracted
and property construction weakened in May, leading most analysts to
say that hopes earlier this year of a bounce in growth have proved
misplaced.
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