Although China's stocks crashed again yesterday, a cut in interest rates by its central bank in particular greatly helped world markets to recover from the 'Brutal Monday' in an effective and meaningful manner. The global recovery in the quickest possible time on an action of People's Bank of China showed the extent of economic might of the former Middle Kingdom that did not allow the 'Brutal Monday' or 'China's Black Monday' to transform into an even worse Tuesday. A global market plunge following the August 11 surprise devaluation of Chinese yuan was expected, the damage wrought by the `Brutal Monday' was quite shocking nevertheless: the global markets plunged after a near-9 percent dive in China shares, the biggest one-day fall since the global financial crisis of 2009, and an over 5 percent decline in oil prices. KSE 100 Index, too, declined massively, shedding 4.11 percent or 1,419.13 points. Though dollar weakened globally, it soared against PKR as Pakistani currency depreciated by 1.8 percent in a single day on the global market rout and the pressures caused by global currencies. The situation in currency and stock markets, which improved quite considerably yesterday, had already warranted State Bank of Pakistan's intervention. Not only did the central bank ask banks to immediately stop forward bookings of dollar, it also asked the exchange companies to "strictly" comply with its rules and regulations aimed at ensuring "fair" business practices (Business Recorder carried the central bank's advice to exchange companies in its yesterday's issue in great detail).
A better appreciation of China's 'meltdown' does underscore the need for one to properly discern the conduct of all global markets-currencies, commodities, stocks-of last Friday, a day that saw, among other things, the following:
The Wall Street slid on China fears while Dow confirmed that it had entered into a correction territory; emerging markets lost their appetite to a record low; oil price slumped to a 6.5 year low; and, according to a Reuters poll, outlook on emerging Asian currencies in the past two weeks deteriorated to its worst in years". The PKR is, however, not among the emerging currencies which are identified as: the Chinese yuan, South Korean won, Indonesian rupiah, Malaysian ringgit, Singapore dollar, Indian rupee, Thai baht, and the Philippine peso. All these currencies, including the Indian rupee, fell to their lowest in years on Monday over signs of deepening economic slowdown in China. India, where Monday has been aptly described by analysts as "Manic Monday", witnessed its Sensex taking the "bloodiest blow of its lifetime," closing nearly 6 percent down.
Oil market experts, however, made it clear that a sharp acceleration in oil price slump on Monday was not because of oil fundamentals; they attributed the fall to China fears. Insofar as other major commodities were concerned, copper, which is considered the barometer or an instrument that registers fluctuations in large-scale manufacturing activities, declined to six-year lows while other major metals, zinc and lead, tumbled to five-year lows. Gold, which soared considerably to trade near a seven-week top in Europe, declined in Asian trade but stayed close to its highest level in almost seven weeks. The bullion's rise was attributable to worries over the Chinese economy that encouraged investors to move towards less risky assets that are generally considered a safe haven.
A slump in palm oil and cotton was also largely ascribable to growing concerns about the Chinese economy. Almost all market trends of yesterday, however, markedly contrasted with Monday's.
Last but not least, despite lackluster economic growth that has significantly reduced the economy's appetite for import of heavy machinery and metals in particular, two commodities that still matter most to Pakistan are oil and palm oil. (palm oil futures continued their decline for a fifth straight day yesterday). A significant decline in prices of these commodities will certainly help the country to further reduce its current account deficit.
The writer is newspaper's News Editor
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