Third Quarter 2015: China, Commodities, and the Fed
Investors shifted their focus from Greece to China in the third quarter of 2015. Greece, after starting the quarter by being the first developed country in history to miss a payment to the IMF, reached an austerity-for-aid agreement with the European Commission. The calm from the deal was short-lived, however, as China’s attempts to curtail its stock market slide grabbed global attention.
The Chinese government, which had already been purchasing stocks outright while banning short-selling, announced a surprise currency devaluation in early August. The move sent world equity prices lower as investors worried about the global reverberations from a Chinese slowdown. Commodities and emerging market stocks were the hardest hit, finishing down 16% and 18% respectively for the quarter while even developed markets declined 10%, in dollar terms.
In the face of this global economic uncertainty, the US dollar continued to climb relative to other world currencies, subtracting from returns to investing in international markets. The decline in commodity prices sent forward inflation expectations downward to levels not seen since the global financial crisis.
The increased market volatility and substantially declining inflation expectations were enough for the Federal Reserve to once again delay raising its key interest rate in September, a hike that seemed certain earlier in the summer. The Fed noted that it believes low inflation readings are transitory and due only to the market decline in commodity prices due to events in China. Both consumer spending and US job growth were strong in the summer months, although wage growth showed no signs of accelerating.
The combination of low energy prices and weak Chinese demand hurt energy and basic material producers in the US as high yield spreads increased substantially. Overall corporate earnings, however, were not materially impacted. The S&P 500 finished the quarter down over 6% and essentially flat over the past year. In the face of global risk re-pricing and the Fed’s delayed rate hike, bonds were positive.