In a recent interview with Bloomberg, Mohammed El Erian, stated that China and the Federal Reserve are the most important themes in the financial market this year. Mohammed serves as the chairman for Allianz, one of the largest insurance firms in the world. He is also the former Chief Executive of PIMCO (Pacific Investment Management Company), the largest bond trading company in the world with more than $3 trillion in assets under management. He is also a regular panellist at the World Economic Forum and the Milken Institute as well as a regular columnist at Bloomberg. Therefore, when he speaks, investors and traders listen.
In the recent past, China has been in the news for a number of things. One, in the June Federal Reserve meeting, the committee members identified the strength of the country as one of the leading factors in tightening the monetary policy. A few weeks later, the Chinese markets started sinking. So far, Shanghai bourse has lost more than 20%. This raises major concerns on the global economy and thus the need for a hike in September. In addition, a report from the Chinese reserve bank noted that the country’s exports were reducing. A slowdown in the Chinese economy can have significant impacts in the global currencies, stocks, bonds, and the entire financial market. A week ago, the Chinese government devalued its currency which lead to significant movements in the market.
Second largest economy
After the United States, the Chinese economy is the second largest economy globally. The country belongs to the BRICS organization which represents the 5 most optimistic countries in the emerging markets. The country is also the world’s largest consumer of major commodities and products. For instance, it is the world’s largest consumer of gold, crude oil, coffee, and copper among others. A slowdown in the economy shows that the uptake of these products could weaken leading to spill overs in other economies. In May, IMF lowered the estimate of global growth from 3.5% to 3.4%.
Delayed interest rates
As stated in the introductory statement, another macro-theme in the financial market is on the interest rate decision. This will be the main market mover this year with many expecting the Fed to hike in September. On Wednesday, the FOMC (Federal Open Market Commission) released the July minutes signalling that the big day for the hike was nearing. This was necessitated by the continued improvement of the American economy. However, for the American government to hike the interest rates, it needs to consider the global economy and if the leader in the emerging market is not okay, then a delay is inevitable.
Oil and commodity prices
China is the largest consumer of oil. The country consumes millions of barrels of oil on a daily basis. In the financial market, these commodities are very significant accounting for billions of dollars. A weakening Chinese economy will have an impact to the oil producing countries especially those in the Middle East which import the commodity there. This will then lead to impacts in their financial markets.
Global companies and China
For a company to be really successful globally today, it must have impacts in China. All companies are constantly seeking on new strategies to enter the market and remain competitive. Therefore, a weakening Chinese economy will have effects in the major exchanges which rely on companies with interests in China. For instance, in the United States, Apple is the largest company. Chinese is its second biggest market. The same applies for companies such as Microsoft, Exxon Mobil, IBM, and General Electric. In fact, when the country devalued its currency, all these companies fell.
For traders, China will remain a very hot topic going forward. Many traders will make and others will lose a lot of money. The key to succeed is to allocate capital wisely, have stop losses, and keep ears wide open. By doing this, you will be at a good position to anticipate any market movements. Another important strategy to apply is hedging where you buy and short two assets with a positive correlation. While the profits in this strategy will be less, your funds will be protected.