http://www.wsj.com/articles/shares-fall-after-fed-reserve-keeps-rates-on-hold-14

Question

http://www.wsj.com/articles/shares-fall-after-fed-reserve-keeps-rates-on-hold-1442563519

Please help me answer properly this questions based on the article link above!

1) Why would the US stock market be affected by China’s move to devalue its currency?

2) In the article, it says, “Many investors felt a rate rise would have signaled the central bank’s optimism about economic growth.” Why is that?
3) “Many emerging markets have been dealt a sharp blow in recent months as a result of a slowdown in China’s economy coupled with fears of a U.S. rate increase.” What does the slowdown of China’s economy has to do with the U.S.?

Explanation / Answer

1). When China devalues its currency i.e. decline in the value of Yuan , this results in increase in the value of the US dollar. It helps the China to make its exports cheaper and have more competitive power in the global economy. It results in increase in Chinese exports, which in other words would result in decline in the value of US exports as these exports become dearer due to appreciation of US dollar. It will badly impact the earnings of US companies. Moreover, all the major commodities such as Oil, Steel, copper and gold are denominted in US dollar, so any appreciation in US dollar will make these commodities dearer, resulting in downward pressure on the demand for these commodities. These factors impact the stock markets.

2). Yes, if fed decides to increase the interest rate; that means Fed is more confident in the recovery of the US as well as global economy. It sees improvement in demand scenario as well as imrovement in the employment conditions. Thatswhy it is in the position to raise the rates as it can exect there is enough demand which will not get hurt by the slight rise in interest rates. So as the Fed did not increase rates, it means Fed is still concerned about the economic situation and not confident enough in the recovery path.

3). China has been global growth driver due to the huge infrastructure investments and high level of exports over the last few years. So slowdown in the Chinese economy means global growth will get impacted , there will low demand for commodities , more supply of cheaper products, lower profits for companies etc.

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