El-Erian: Chinese Concerns 'Legitimate,' Market Reaction 'Excessive'

The primary source of market fears that have driven the S&P 500 down 10.9 percent so far in 2016 is China’s weakening economy. In a new report, Goldman Sachs analyst Allison Nathan looked at how China fears have impacted global financial markets and whether those fears are excessive.

“We find that macro spillovers from China to the major economies are likely manageable, the fist of FX debt mismatches tied to a weaker CNY and EM currency pressures is limited, and that assets are pricing much more pessimistic growth scenarios for China (and the US) relative to recent data and our own views,” Nathan explained.

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Nathan explained that Goldman economists estimate that global financial markets are currently pricing in growth in China that is under 2.0 percent, well below any current forecasts. China’s 6.9 percent GDP growth in 2015 was its lowest in 25 years.

“Markets have overreacted to China for the same reasons they will overreact to virtually any news: changes in the volatility and liquidity paradigms,” Allianz Chief Economic Advisor Mohamed El-Erian explained.

So far this year, the iShares FTSE/Xinhua China 25 Index (ETF) FXI is already down 19.9 percent, while the iPath S&P 500 VIX Short Term Futures TM ETN VXX has spiked 51.0 percent.

Disclosure: The author holds no position in the stocks mentioned