Afternoon analysis 24.08.2015

Growing anxiety on the global financial markets. The euro hit the highest level against the dollar since mid-January. The emerging markets sell-off did not include the zloty.

On Monday, the anxiety in the financial markets increased significantly. The major issue for investors was the situation in China. After the yuan's devaluation by the People's Bank of China investors have been worrying that the second largest economy in the world is slowing down. The notion that the markets missed rising problems in the Chinese economy has started to prevail.

The latest reports from China were quite weak. In July export declined by 8.3 percent on a yearly basis. Import dropped to a similar amount, signaling that the economic expansion is weakening. The PMI index, a measure of the expansion in the production sector, dropped to its lowest level in 77 months.

The People's Bank of China did not support the markets by a rate cut. Over the past week, investors speculated that a similar move may be possible. However, there was no cut in spite of the fact that the Chinese monetary authorities have space for a move.

Severe declines

Today's session on the world markets was hit by severe declines. The European markets dropped by the most since 2008. Moreover, thirteen out of eighteen European markets entered correction, according to Bloomberg data. Also, the US markets started the day with significant declines. The S&P 500 index dropped 5 percent in the beginning of the session. NASDAQ and Dow Jones dropped by a similar amount.

The sell-off continues despite the fact that the situation in China limited the probability of the interest rate hike in September by the Federal Reserve. The probability of a similar move declined to about 30 percent.

The dollar was very weak. The US currency dropped to the lowest level since mid-January against the euro. The EUR/USD increased above 1.17 dollars.

Commodities plunged

China's problems hit the commodity markets as the country of the largest importer in the world. The oil price in New York dropped below 38 dollars to the lowest level since February 2009. Also the copper price hit the lowest level since mid-2009.

The sell-off increased pressure on the commodity currencies. The Russian rouble is going through a heavy period. The USD/RUB exceeded the level of 71 dollars. If the session is ended at this level, it will be the highest close in history. The sell-off hit the South African rand, the Turkish lira and the Mexican peso. The currencies of countries with strong ties with China also declined (Australia, New Zealand or Asian countries).

However, the zloty was relatively steady. The Polish currency dropped significantly only against the euro. The currency was stable against the Swiss franc. The zloty managed to gain against the dollar and the British pound.

The zloty's performance was caused by the fact that the Polish economy is in a different situation than other emerging market economies. China's share in the Polish export is limited (about 1.1 percent) and low commodities prices support the expansion. Later today, the zloty started to recoup the earlier losses. However, the performance of the Warsaw Stock Exchange was very poor as the WIG20 index dropped more than 7 percent.