Thursday, March 29, 2012

Economy and markets....

This posting is for those with more than a passing interest in the stock market.
Yesterday the stock markets in China fell very sharply. 2.7% in Shanghai, 4% in Shenzhen.
I saw this headlines on the AFP : China shares lead global retreat as traders worry of impact of softer US recovery.

Two days ago, the US stock indices hit 4 year highs. Yesterday, according to the author investors and traders in China sold Chinese stocks worried about the slowdown in USA. This explanation just makes no sense. Why are Chinese stocks being sold and US stocks are hitting 4 year highs when there is a slowdown in USA? Shouldn't US stocks be sold down instead?

China will see growth upwards of 7.5%, Europe is in recession and US will do about 2-3% growth which is good for a developed country. The stock market in Europe which is in recession outperformed the Chinese market for this year - they are in recession and China is still one of the fastest growing economy on the planet.

Some people say that the Chinese markets are down because it is growing slower than expected so it is due to disappointment over growth. However, those who invested in China when it was growing faster than expected 8% have lost money in the past 3 years. Basically the stock market can be down, up or sideways ...regardless of what the economy is doing. But pundits love to make sense of  day to day market moves using explanations that revolves around the economy. While it is true, that markets do fall when economies go into recession - it also rise and fall for reasons completely disconnected from the economy. Investors alternate between minor euphoria and minor depression on a weekly basis.

3 weeks ago when the Chinese market were doing better, the Shanghai index had 7 weeks of straight gains in a row on 2 March 2012 and was at a 15 week high with a sharp rise on that day of 2%[China Shares End At 15-Week High; Shanghai Up 0.8% On Week] if you read reports on that day, you would think that everything is going smoothly in China, the economy is slower but still growing moderately, monetary policy is easing, housing market is recovering, ...its basically all systems go. 2 weeks later, analyst write that it is in a hard landing[JP Morgan analyst] and that view too hold and that led investors selling their stocks...this selling cascaded into a mini panic yesterday.

In the midst of noisy economic data, fast changing views of pundits on the media and stomach wrenching swings on the stock market, it becomes hard to think clearly about what is really going on and invest wisely. Much of the moves are the result of speculative trading activity pushing prices around for short term gains and little to do with big shift in the underlying economy.  A lot of major trends in the market has to do with liquidity rather than the economy.

The most significant news this week perhaps is that of Bernanke announcing that the job market in US remain weak and faster economic growth is needed to revive the job market. To get unemployment down he is prepared to print more money by doing a QE3. If you look at the chart above, everytime the Federal Reserve stop its liquidity pumping activity, the stock market faltered dampening confidence and that threatened to take the economy down with it. By pre-empting this, Bernanke may have engineered the next leg of this bull market ...and perhaps a mini bubble is in the works.

China has the tightest monetary policy in the world. I wrote in a previous posting that the Chinese economy has numerous problems but the govt has plenty of bullets to steer it. Just a hint that the Chinese authority is ready to loosen monetary policy will remind investors to look forward to more easing and not economic figures that are backward looking. Forgive me if I'm wrong but I think the sharp fall on Wednesday is just a mirror image of the spike on 2 March 2012 when investors became too euphoric....now they are too pessimistc (and can only feel better?) so we should see this as a bottom (or close to the bottom) rather than a precipitous drop to the abyss for the Chinese markets.

Before I forget and sign off, remember I'm not a professional in the financial sector so take what I say with a pinch of salt. It is just my personal thoughts and I can be wrong.
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Chinese shares lead global retreat as traders worry of impact of softer US economic recovery


LONDON — Chinese shares led global markets lower Wednesday as investors fretted over the outlook of the world’s second-largest economy and whether the U.S. economic recovery was losing its shine.
Mainland Chinese shares saw their biggest loss in almost four months following a run of disappointing U.S. economic figures, with investors worrying that weak U.S. consumer demand could add to the contraction already being experienced by Chinese manufacturers.


The benchmark Shanghai Composite Index slid 2.7 percent to 2,284.88 while the Shenzhen Composite Index dived 4.1 percent to 909.58

“Concerns about a slowdown in the Chinese economy are continuing to depress the Shanghai Composite,” said Neil MacKinnon, global macro strategist at VTB Capital.

U.S. economic indicators have mostly surpassed expectations this year, particularly with regard to the jobs market, and that has supported stocks. An easing in Europe’s debt crisis has also helped, though many investors remained skeptical of claims — as made by Italian Premier Mario Monti this week — that the crisis was almost over.

In recent days, the economic newsflow out of the U.S. has been fairly disappointing. The Conference Board said Tuesday its index of U.S. consumer confidence slipped in March and the Federal Reserve Bank of Richmond, Virginia reported that a measure of regional manufacturing plunged this month.
U.S. durable goods orders for February, due for release later, will be assessed in the context of the country’s recovery. Durable goods are products expected to last at least three years, such as appliances, cars, machinery and airplanes. The consensus in the markets is that they grew by 3 percent in February, following a big 3.7 percent decline in January.

In Europe, the FTSE 100 index of leading British shares was down 0.3 percent at 5,855 while Germany’s DAX fell 0.4 percent to 7,053. The CAC-40 in France was 0.2 percent lower at 3,462.
U.S. shares were poised for a flat opening with both Dow futures and the S&P 500 futures up 0.1 percent.

Elsewhere in Asia, Japan’s Nikkei 225 index dropped 0.7 percent to close at 10,182.57, a day after the benchmark shot to a one-year high. Hong Kong’s Hang Seng ceded 0.8 percent to 20,885.42 and South Korea’s Kospi shed 0.4 percent to 2,031.74.

In the currency markets, the euro remained buoyant as the dollar continued to struggle in the wake of the disappointing U.S. economic news — it was trading 0.3 percent higher at $1.3363.
Oil prices tracked equities lower, with the benchmark New York rate down 90 cents at $106.43 a barrel.

12 comments:

Anonymous said...

"While it is true, that markets do fall when economies go into recession - it also rise and fall for reasons completely disconnected from the economy."
Lucky Tan

That means the rise and fall is man made and not due to market forces lah, right?

Because the economy, especially Singapore, is driven by market forces, right?

Or else PAP can make the economy always very good what, right?

But one thing everyone can see is that at least 60% will vote PAP, for reasons completely disconnected to how people like Lucky Tan feel and talk bad about PAP policy and outcome.

Anonymous said...

You may think you are more rational than you are. But the day to day market trading result shows we are not that rational after all. So are the 60%+40% of Singaporeans during the last election. So it will be for next election also. Human beings are not that rational as you think they are.

Anonymous said...

"Because the economy, especially Singapore, is driven by market forces, right?"

If Singapore economy is driven by market forces, then why must pay highest salaries in the world?

Market forces by definition operates 24 hours a day, 365 days a year, without collecting a salary.

The said...

One key reason - the stock markets always lead the economy.

China has been growing at near-double-digit growth for so many donkey years that a slow-down to 7%-9% is bad news. Also, many of the excesses are coming to roost soon.

OTOH, the US has been in deep shit for quite a few years now and looks like recovering in the near future.

So, in summary, China's economy has been doing very well in the past few years, but the short-term prospects is not as bright as the present. The US economy has been doing badly in the past few years, but the short-term prospects is better than the present. The stock market discounts the future.

Anonymous said...

Lucky, the political situation in China is nervous. There are deep fractures amongst the top elites. The infighting has reached a level serious enough for Premier Wen to warn of another cultural revolution. So do be careful here. Those well connected are getting out and sending their children and wealth overseas. This political uncertainty will continue to hang over businesses and investments in China.

On the other hand there are so much excess liquidity in the world. The hedge funds having missed this run up are just beginning to get into the acts. So we should see some really wild trading days ahead as the well connected liquidate and the hedge funds move in.

Anonymous said...

Lucky,

I am just amazed that with a one-man-show (I assumed), you are able to cover a wide range of topics and present them with easy to read manner to your readers.

Thank you very much.

Ng Eng Hou said...

The US economy is not strong but will look good this year, because President Obama has to make it look good enough to get himself re-elected, so US stockmarket will be stronger than in Asia. For the Chinese economy, it is still growing at a relatively stronger rate than many countries, but not as strong as it used to be at over 10% growth rate. People have been so used to China growing at over 10% rate, so the likelihood that this is not going to happen and the fear that its growth rate may decelerate to 5-6% which is a disaster for China make a lot of people feel uncomfortable, which causes the stockmarkets in China and other Asia countries to look relatively weaker than in the US.

This is all about managing the expectation. Lousy economy can still get a strong stockmarket performance if in reality it is less lousy than what most people expect. Strong economy may not have a strong stockmarket, if the economy growth rate is below what most people expect.

This is just pure psychology!

Anonymous said...

If stock market goes down, print more money.

Printing money is good for the US as it
1. reduces real US debt
2. it costs nothing (re COE)
3. buys time
4. is pain distributed over a longer time, as compared to a depression
5. makes the US more competitive
6. is probably the only way to bring jobs back to the US
7. props up the property market

Hence, the stock market will not go down as far as DJ Index is concerned but not so in real terms.

Ghost said...

Relax people. It seem more like a case of people taking profit than anything else.

Anonymous said...

You are not a professional but you make more sense than most professionals. The key reason to know is that the professional is trying to sell you something rather than understanding what moves markets. Remember they are collecting management fees for their talk and in most cases attributing the reason after the market has moved. They can attribute all the common reasons, inflation, interest rates, oil price, war news etc. The fact is market go up when there more more buyers than sellers and vice versa and this sentiment can change on a dime. In the long run, the market is dependent on the money supply (liquidity)which have to keep expanding otherwise the market will collapse. Alternatively they manipulate is so much that the system burst. Right now the US is the centre of it all and so they will control it to their advantage. So they will inflate their debts away. If the US overdo it, then other countries will take more and more defensive measures, moving away from the US$. This will take some time given that the US is the largest economy and most transactions are priced in US$. Until such time that there is a challenger such as yuan or euro, it is status quo.

Anonymous said...

Interest rates are low...very, very low.
And it will be low for the next 4 years.

FED already committed to low rates till 2014
ECB already committed to low rates till 2016

So what will happen between this time frame?
Stock market will swing wildly for no reason at all. This is caused by the oldest gambling activity of all... the market.

But because rates are low and money aplenty, where will it go?

It has already gone to GOLD
It is still

It has already gone to PROPERTY
It is still

Money aplenty seeks a return that narrows the gap of inflation.

GOLD & PROPERTY requires huge sums of money.. the stock market offers a cheaper alternative especially penny stocks or more affordable prices..

For the brave ones.. playing the market ( after selling or flipping properties ) offers a quick fix for adreline junkies.. their courage borrowed from being paid high COV.

Stay out otherwise.. if you are already invested, stay in.
Sit back and enjoy the armchair view.

Collapse you say?.. no way. If they can do what they did to GREECE.. and also USA... and also UK.. the music plays on!!

Anonymous said...

The latest BRIC meeting "confirmed" what you said. The BRIC tells EU & US they can keep their money. Maybe paid me in gold or some other commodities will be more common in future.