US markets closed lower as China roils global markets

12 Aug 2015 Evaluate

The US markets closed lower on Tuesday, in the wake of a surprise devaluation of the yuan by China - the world’s second-largest economy. China’s devaluation calls into question how the US economy may fare as the Federal Reserve aims to start hiking interest rates for the first time since 2006 as sign of slowing growth abroad persists. On the economy front, the dry spell of productivity in this economic expansion is even worse than previously thought. The average annual rate of productivity growth from 2007 to 2014 was revised down to 1.3% per year from the prior estimate of 1.4%. This is well below the long-term rate of 2.2% per year from 1947 to 2014. Productivity in 2013 was especially weak, revised down to unchanged from the prior estimate of a 0.9% gain. Productivity even dipped below zero for three quarters in 2013. That hadn’t been seen since 1982.

Moreover, wholesale inventories jumped a seasonally adjusted 0.9% in June, though May levels were revised lower by 0.2% to show a 0.6% gain. The gain in inventories during June was led by motor vehicle and motor vehicle parts and supplies, which rose 2%, and offset a 2.1% fall in computer and computer peripheral equipment and software. The June ratio of inventories to sales was 1.3. Separately, small business sentiment rose in July after two months of declines. The National Federation of Independent Business’ small-business optimism index rose 1.3 points to 95.4. Expectations for business conditions and real sales gains accounted for half the net gain in the components.

Meanwhile, the former chairman of the Federal Reserve, Alan Greenspan, who served as Fed chairman between 1987 and 2006, warned that the world is entering a bond market bubble. Greenspan also added that low productivity was one of the major challenges facing the US and other advanced economies. Greenspan, who has been criticized for fuelling the US housing bubble by keeping rates down in the early 2000s and failing to keep a closer eye on banks, said behavioural economics was playing a central role in investor decision making.

The Dow Jones Industrial Average lost 212.33 points or 1.21 percent to 17,402.84, the Nasdaq dropped 65.01 points or 1.27 percent to 5,036.79 while, the S&P 500 was down by 20.11 points or 0.96 percent to 2,084.07.

The Indian ADRs ended in red on Tuesday, Tata Motors was down by 1.85%, Dr. Reddy’s Lab was down 1.50%, HDFC Bank was down 0.73%, ICICI Bank was down 0.27% and Wipro was down 0.27%.

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