China slump rattles global markets

31 Aug 2015 | Author: | No comments yet »

Calm on Wall Street: A turbulent week ends on a placid note.

U.S. shares moved sharply greater Thursday afternoon as buyers took benefit of this week’s massive sell-off so as to add to their holdings. Days after China threw the biggest scare into Wall Street in years, U.S. stocks have come surging back and ended the week Friday on a placid note that suggested the worst may be over for now.

The inventory market is rebounding from a pointy six-day droop that was triggered by considerations concerning the well being of the Chinese language financial system. Anthony Bolton, Fidelity’s famed stockpicker, launched a China fund in a year when the Asian nation’s economy grew by almost 12 per cent in the first quarter.

The Dow Jones industrial average fell a scant 11.76 points Friday, or 0.1 percent, to 16,643.01, capping a week that saw stomach-churning losses and gains of around 600 points per day. Mr Bolton’s legacy fund — now run by Australian small-cap specialist Dale Nicholls — today trades on the London Stock Exchange at a wide 20.5 per cent discount to net asset value, depressed by China’s surprise currency devaluation this week and volatility on the Shanghai stock market. These dramatic falls, which followed a more gradual but still stomach-churning 11.5pc decline in Chinese stocks the week before, ripped through global markets. The dwindling number of China bulls argue that while its economic growth has slowed to 7 per cent, this level will be sustained as long as the country remains closely controlled by Beijing policymakers who determine everything from bank rates to birth rates. “You can see the Chinese government is trying to control the growth rate,” said Brewin Dolphin Asia Pacific analyst Mike Paul, referring to measures such as Beijing’s clampdown on so-called shadow lending by funds and trust companies. “You can argue they can raise it again.” In 2009, to shelter China’s economy from the global recession sparked by the sub-prime lending crisis in the US, Beijing prompted what could be a sub-prime crisis of its own. Before the six-day losing streak had ended, the Dow had plummeted 1,900 points and the S&P 500 was undergoing its first “correction,” a decline of 10 percent or more, in nearly four years.

In the last 25 years, the Shanghai Composite, China’s benchmark stock index, has closed within one percentage point of the previous day’s close on just 56% of all trading days, with an average movement of 0.09% (see chart). But stocks soared at midweek, cutting the Dow’s losses nearly in half, in a rally analysts attributed to bargain-hunting, signs that the Federal Reserve may hold off raising interest rates this fall, and a new report that said the U.S. economy is growing at a more robust rate than previously believed.

Still, the concerns that triggered the sell-off remain: slumping oil prices, a slowing Chinese economy, weak corporate earnings forecasts and uncertainty over interest rates. “For the last few years, let’s face it, there’s been very little volatility,” said JJ Kinahan, TD Ameritrade’s chief strategist. “We’ve had a very impressive rally. U.S. shares are rallying for a second day after logging their greatest efficiency in virtually 4 years Wednesday, because the market bounced again from its six-day stoop. Such market gyrations have, more than at any time since the Lehman Brothers collapse in September 2008, raised fears of a renewed financial crisis, with all the related economic, political – and human – fall-out. Not that we can’t go higher, but it’s not going to be an easy path to get there.” Despite the bounce-back this week, stocks are on course for their worst monthly performance in more than three years. Hong Kong’s Hang Seng Index, which offers shares in many of the same companies that can be purchased in freely exchangeable Hong Kong dollars, has fallen 13 per cent.

Financial institution Personal Shopper Reserve. “Capital comes again in, discovering valuations to be extra favorable than every week in the past.” Monetary markets have been risky since China determined to weaken its foreign money earlier this month, a transfer buyers interpreted as an try and bolster a sagging financial system. Because he recently left his job, Chang has to sell investments he bought with stock options within 90 days — something he can’t do now without taking a big loss.

Federal Reserve Vice Chairman Stanley Fischer said Friday that before the recent turbulence, there was a “pretty strong case” for raising rates in September. William Dudley, president of the New York Federal Reserve Financial institution, stated Wednesday that the case for a U.S. rate of interest hike in September is “much less compelling” given China’s troubles, falling oil costs and rising markets weak spot. Indeed, the FTSE 100’s 4.7% drop on Monday, at 4.2 standard deviations from its average return, was a bigger outlier (about 1 in 10,000) than China’s market decline, at 3.2 standard deviations (5 in 10,000). The reversal on Western markets, meanwhile, was largely driven by a senior Federal Reserve official hinting that an interest rate rise, previously signalled for September, is now “less compelling” given renewed financial volatility.

A similar sentiment has spread to the UK, with investors betting the Bank of England won’t raise rates until October 2016 – six months later than expected just a few weeks ago. There is also now rampant speculation, which the Fed isn’t discouraging, that America will soon engage in yet another round of quantitative easing – so-called QE4. STRONGER GROWTH: The Commerce Division stated that the financial system, as measured by gross home product, expanded at an annual fee of three.7 % within the April-June quarter.

The other listed option for UK investors is the JPMorgan Chinese Investment Trust, which focuses more on large blue-chip companies that dominate China’s economy. This fund is also highly geared, at around 116 per cent, which its client director James Glover said is because there are multiple “opportunities” from the “pullback” in equity markets. The Western world is similarly engaging in gross market distortion, albeit of a different kind – by keeping real interest rates firmly in negative territory and, once again, desperately stoking shares with the promise of further hundreds of billions of dollars of virtually printed money. Having grown 9.8pc a year since the late-1970s, the economy of the People’s Republic now outstrips that of America on a purchasing power parity basis (adjusted for living standards).

The stock market remains some 40pc down since June – and China’s banks have a swath of non-performing loans smouldering on their balance sheets, after years of over-investment in projects driven by political rather than economic logic. Having said that, China’s property market, which drives economic sentiment to a greater extent than equities and underpins the banking sector, remains buoyant. In recent weeks, and particularly since last Monday, a narrative has emerged that global financial markets could now crash, but if they do, it will be the fault of the rest of the world – and, in particular, China. If only those pesky emerging markets could run themselves properly, goes the Western narrative, then we would not have to endure the market volatility caused by their bad decisions. In 1998, an emerging markets crisis, starting in Thailand and then spreading across Asia to Russia, was indeed the catalyst for a significant downturn on global markets.

The collapse derived from chronic private and public sector indebtedness across such countries, many of which were in the throes of emerging from years of economic isolation. And since that crisis, it has been the West’s failure to stage a meaningful economic recovery, despite massive monetary and fiscal stimulus, that has prevented the global economy from firing on all cylinders. If we are on the brink of another “Lehman moment”, then it is the West’s response to the sub-prime crisis – above all, our continued reliance on growing debt and monetary stimulus – that must take a large share of the blame.

Then there is the dark shadow that has long been cast over global markets by the potential unravelling of the grossly incoherent grand project that is Europe’s single currency. In part, to demonstrate to the International Monetary Fund enough flexibility that Washington might deign to allow the yuan to be included in the official reserve currency basket.

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