The Blame Game: Is China Responsible, or the Fed?

China has been in the headlines and is widely seen as the culprit for the global financial turmoil. China disagrees. In fact, an official from the People’s Bank of China has blamed the Fed for the mess, given its plans to hike rates this year. The country has joined the IMF in urging the Fed to delay its pending rate hike – or call it off altogether.

The dollar is already stronger given expectations of a rate hike. It we get one, the dollar will be stronger still! That could devastate emerging markets like China that rely on capital inflows, or that are trying to pay off U.S.-dollar denominated debt.

Whether China or the Fed is to blame for this market volatility, one thing’s certain – the Red Dragon dominates commodity consumption. So when China stops buying, commodity demand dries up and prices fall. That means that as China slows, as it is now, economies that depend on commodity exports will suffer.

Like Rodney said last week, there are so many factors at play in the global economy that you can’t place the blame on any one thing. But there’s no arguing that the Fed has kept world markets on edge the past year, or that China’s economic troubles have added to the frenzy.

Yet despite all the volatility and turmoil in the air today, rates on the 30-year U.S. Treasury bond have risen the last couple days – something you would normally never expect to see during a market panic.

Usually, when the stock market is crashing, bond yields fall and bond prices rise as investors look for protection.

But China has actually been selling U.S. Treasury bonds, propping up yields that would otherwise fall as worried investors pack in. So, while I expected U.S. Treasury bonds to rally sharply on the stock sell-off, the bond reaction was muted. I guess $100 billion in Treasury bond sales (all thanks to China) will move the market!

So, the question remains: will the Fed raise rates?

Several indicators suggest that deflation is still very much a threat, and the Fed knows it. There are some other data points to digest before they decide their next move. For now, your guess is as good as mine. Whatever happens, I’ll have Dent Digest Traders positioned to ride the market.

Lance Gaitan

Lance Gaitan
Editor, Dent Digest Trader

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Categories: Interest Rates

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.