Sydney: Investors burned by turmoil in global markets are looking for signs the world’s top finance officials are ready to take action to bolster growth and calm currency moves.
As finance chiefs and central bankers from Group of 20 nations begin talks in Shanghai, Citigroup’s Steven Englander said a failure to include more explicit support for fiscal stimulus in the closing statement from policy makers would be taken badly by investors. For Andrew Brenner, head of international fixed income at National Alliance Capital Markets in New York, a commitment to fiscal expansion and clarity on China’s currency policy will send equities higher next week, while stocks will slide if those issues aren’t addressed.
The meeting comes amid a weakening in global demand that’s sent equities into a bear market and stirred up foreign-exchange volatility. China’seconomic slowdown, slumping stocks and weakening currency are in focus, while the impact of negative interest rates in Japan and Europe, a strengthening US dollar and the scope for governments to boost spending are also likely to be on the agenda.
"Keeping the previous language would be very disappointing and would be viewed as either complacent or reflecting policy paralysis," Englander, Citigroup’s head of currency strategy for major developed economies, said in a February 25 report. He urged the G-20 to "man up and tell member countries that monetary policy should be accompanied by fiscal expansion."
While officials including US Treasury Secretary Jacob J. Lew have indicated there won’t be a massive global effort to stem financial-market turbulence, the International Monetary Fund said in a report this week that the G-20 "must act now to implement forcefully" existing growth strategies while also planning for unified support for demand through government spending.
Ahead of the two-day meeting that starts on Friday, China’s Vice Finance Minister Zhu Guangyao said fiscal stimulus should be deployed to boost global growth, while Yi Gang, the deputy central bank governor, said the nation will maintain a relatively stable currency as it embraces market forces.
"I still think your big moves are slated for after the G-20 meeting this weekend," said National Alliance Capital Markets’ Brenner. "If the G-20 does what I think they’re going to do, which is make some comments to stabilise the thought process of the Chinese currency — in other words that everyone will be there to help the Chinese if there are issues — if they can accomplish that and the US government is convincing enough that countries are going to use fiscal stimulus, between those two, I’d think you’re going to be in better equity markets next week."
The MSCI All-Country World Index added 0.2 per cent as of 10:03am in Shanghai on Friday, and is down 6.5 per cent this year.
Analysts are more sceptical about the G-20’s ability to coordinate policies to control gyrations in foreign-exchange markets. Currency traders are enduring the most volatile February in six years, with three-month price swings for the yen surging to 10.6 per cent, the highest since March, and a measure of future fluctuations approaching the highest since 2013.
Still, there appears to be little prospect of a deal along the lines of the 1985 Plaza Accord, where the governments of the US, UK France, West Germany and Japan agreed to weaken the dollar.
"Agreement on appropriate FX levels has been elusive at the G-7, let alone the G-20 level," BNP Paribas SA strategists Daniel Katzive and Vassili Serebriakov said in a report. "We think policy makers are more likely to reiterate the standard two-pronged approach, namely a call to refrain from competitive currency devaluations and a statement that excessive FX volatility is undesirable."
As crude oil’s drop to a more than 12-year low led a slump in commodities, more than $6 trillion has been wiped off the value of global equities this year. Share gauges in Europe, Japan and China lost more than 10 per cent since December 31 and US indexes retreated at least four per cent. The Shanghai Composite Index tumbled 6.4 per cent on Thursday.
Bond markets have rallied, with the Bloomberg Global Developed Sovereign Bond Index advancing 5.1 per cent.