World Markets: Whats Next

Moody’s cut its 2016 global economic growth forecasts on Friday, with China and United States both trimmed and Russia and Brazil seen staying in recession.

It was a surprise move from the firm, coming just 10 days since its last forecasts. It put average growth in the top 20 world economies at 2.8 percent on average, versus the 3 percent it had forecast previously.

It said the fresh cut reflected information that had become available since the earlier forecasts were published.

China, Japan and Korea’s growth saw downgrades partly due to expectations of more muted exports. Emerging markets Turkey and South Africa had their forecasts reduced too.

“The (China) policy stimulus measures that have been implemented have been broader-ranging and larger than we had expected. This suggests that the underlying economic environment is weaker than we previously thought,” the report said.

“We have revised our U.S. 2016 forecast down slightly as the negative impact of the stronger dollar seems more pronounced than we assumed previously,” it said cutting it to 2.6 percent from 2.8 percent.

It kept its euro zone forecast unchanged despite the recent turbulence in Greece, at 1 and 2 percent in 2015 and 2016.

It said Brazil’s output would shrink as much as 1 percent in 2016 and Russia’s as much as 1.5 percent.

“The price of many globally-traded commodities has fallen very sharply in the last 18 months. The slowdown in China, a major consumer of commodities, will continue to weigh on prices,” Moody’s said.

Concerns about China’s economy have whipsawed markets, including Wall Street, even while U.S. economic data has been robust. U.S. stock indexes ended largely unchanged, capping a week that included both the market’s worst day in four years and biggest two-day gain since the 2007-2009 financial crisis.

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“I think they could settle fairly quickly,” said Fischer, a close ally of Fed Chair Janet Yellen.

The Federal Reserve on Friday left the door open to a September interest rate hike even while several U.S. central bank officials acknowledged that turmoil in financial markets, if prolonged, could delay the first policy tightening in nearly a decade.

Some top policymakers, including Fed Vice Chairman Stanley Fischer, said recent volatility in global markets could quickly ease and possibly pave the way for the U.S. rate hike, for which investors, governments and central banks around the world are bracing.

With a key policy meeting set for Sept. 16-17, at least five Fed officials spoke publicly in what amounted to a jockeying for position on whether increasing the Fed’s benchmark overnight lending rate was too risky amid an economic slowdown in China, a rising U.S. dollar .

St. Louis Fed President James Bullard told Reuters he still favored hiking rates next month, though he added that his colleagues would be hesitant to do so if global markets continued to be volatile in mid-September.

The Fed’s policy committee “does not like to move right in the middle of a global financial storm,” Bullard, a Fed hawk, said in an interview. “So one of the advantages we have is that this storm is occurring now and, at least as of now, we think it will be settled down” by the September meeting.

The comments suggest the next two and a half weeks will be critical for the Fed as well as for global markets. A U.S. rate hike is expected to hit emerging market equities and currencies particularly hard, adding to the sell-offs already seen.

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