Japanese growth data released today confirmed that second-quarter GDP contracted despite a slightly better-than-forecast pace of –0.4 percent versus the prior three months. With this latest confirmation of slowing growth in Asia, U.S. and German treasury futures rose marginally in trading. In particular, the Malaysian ringgit continues its losing streak today after losing nearly 4 percent against the dollar last week. Bank Negara Malaysia governor Zeti Akhtar Aziz warned last week that the central bank’s currency reserves had reached a dangerous level, sliding below $100 billion for the first time since 2010, yet ruled out capital controls.
Wall Street expects yuan to sink further. The People’s Bank of China raised the trading band for the yuan today by 0.01 percent to a spot level of 6.3969 per U.S. dollar. While the Chinese central bank maintains that it is merely liberalizing the mechanism by which it sets the value of the nation’s currency, multiple bank strategists have published reports with guidance for significant further devaluation. In a report issued today, Barclays analysts wrote that a further slip of 7 percent is likely before year-end.
Brazilian protesters call for Rousseff to step down. In a series of protests yesterday in major urban centers across Brazil, tens of thousands took to the streets to call for a referendum to impeach embattled President Dilma Rousseff. Multiple local polls have indicated that voter support for the Rousseff administration has dwindled to single-digit levels as fallout from the Petrobras scandal continues to roil the nation.
Merkel says IMF to participate in Greek bailout. German Chancellor Angela Merkel indicated in comments today that she is willing to discuss debt relief to secure the involvement of the International Monetary Fund in the latest bailout agreement for Greece. In advance of a vote required to ratify German participation, a number of conservative members of Merkel’s parliamentary coalition remain opposed to the aid package.
Cargill acquires Norwegian firm. In a $1.5 billion acquisition today suburban Minneapolis–based commodity giant Cargill announced the acquisition of Norwegian salmon-feed producer EWOS. This marks the latest investment by the firm in the aquaculture segment as global interest in fish farming continues to increase.
QVC owner is buying Zulily. Liberty Interactive Corp., operator of the QVC shopping network, agreed to acquire five-year-old online retailer Zulily for $2.4 billion, a 15 percent discount to its IPO price in late 2013. In May Zulily made headlines after Chinese online retail giant Alibaba disclosed that it had acquired a 9 percent in the Seattle-based company.
Portfolio Perspective: China and Cracking Open the Capital Account — Sean Darby, Jefferies
We at Jefferies do not believe that China has entered a currency war. We believe they have free-floated the currency in line with the recommendations made by the IMF concerning China’s application for special drawing rights membership. Moreover, the falls in the yuan are in line with the allowed daily band of 2 percent. It is much better for an economy to free-float the exchange rate from an overvalued position than an undervalued.
The move in China’s currency to a free-float is in line with their efforts to open up the capital account. We remain very optimistic that the authorities have preempted markets by simply liberalizing each financial market in quick succession. First, the Shanghai-Hong Kong connect commenced late last year to allow access to the stock market. Secondly, foreign participation in the interbank bond market was expanded in July. Once the Shenzhen-Hong Kong Connect takes effect, we would expect the authorities to allow a ‘bond-connect’ to occur, since government bonds are traded on mainland exchanges already.
Sean Darby is the chief global equity strategist for Jefferies in Hong Kong.
