Many financial analysts have rushed to describe the current global stock market turmoil as a historic event, unprecedented, a bloodbath, however its evolution has so far been quite traditional. The correction, if that’s what this is, has been building since 2011/12 when many analysts began to question the numbers attached to Chinese growth. The questioning subsided with markets peaking earlier this year reaching new optimistic highs – April ’15 marked historic highs for all global indices.
And while markets around the globe rally to retake losses, China and it’s growth remains the question on everyone’s lips, what is the real number? …and will that number dictate a correction or crash for markets!?
Globally this current selloff started as a repricing of growth outlooks, in the main based on believable or unbelievable numbers out of China over the past 5 years, mounting evidence of economic weakness in the worlds second largest economy, coupled with persistent low growth in Europe and Japan, made it hard for markets to ignore the impact on earnings and profitability of what looked suspiciously like a global slowdown ::::
What might be different this time however is whether longer-term stability can be restored with policy tools that have been available in the past. Panic on global markets overnight was palpable as fears of a Chinese economic slowdown gripped investors. Asian and Australian markets tanked on Monday after China’s Shanghai index shed 8.5 percent, markets across Europe were smashed, London’s FTSE lost more than 4.5 percent, dipping to 5,899, its lowest level since 2012, wiping $162 billion from the UK market. Yesterday the U.S. Dow Jones tumbled more than 6 percent, 1,000 points, shortly after the opening bell. Big name stocks like JP Morgan plummeted more than 20 percent on trading, stalwart Apple stocks ditched 13 percent.
The last 5 days of trading on the U.S. markets have seen the blue chip Dow Jones Industrial Average fall with drops of 0.2, 0.9, 2.1, 3.1 and 3.6 percent. The worst performers have been a mix of energy companies, such as Exxon Mobil and big banks like Goldman Sachs.
The tumble culminated yesterday when the benchmark S&P 500 lost close to 4 percent to 1,893, during trade the S&P fell into an official correction for the first time since 2011 in one of the most volatile trading days ever. A key measure of market volatility, the VIX, shot above the 50-point mark for the first time since 2009 before easing back to 35, which is still up 43 points on the previous session. The tech-heavy Nasdaq lost 3.8 percent.
In Australia markets rallied yesterday, however the day marked the first time Australia’s major share indices dropped below 5,000 points in more than two years. As trading opened yesterday, the benchmark ASX 200 was initially off 1.5 percent to 4,928, while the broader All Ordinaries index, which includes smaller firms as well as the top 200, was down 75 points to 4,939. Within half an hour of trading, the Australian market had edged into positive territory as investors looked to pick up battered blue chip stocks.
The bounce in Australian markets was of course short lived, with the bears – market pessimists – taking control back from the optimistic bulls, and the sell-off resumed at pace.
The uncertainty about what will happen in the world’s second largest economy – China – has seen share market volatility rise to extreme levels, even as many global markets rally – namely European indices – our local market is seeing some of the highest volatility for several years (as measured by) the Australian VIX was up 53 percent yesterday to the highest level in 2 years.
The volatile trading is very telling, if you’re happy to trade and invest in volatility then this market’s been offering you gift. However, it may not be a gift that keeps on giving?!
So… Correction or Crash?
So if the question on everyone’s lips is China, what’s the answer, quite simply, how big and deep has the lie been. China has claimed an average of around 7 percent growth for the past few years, some analysts believe the real number is closer to 2 percent, optimists reckon 5 percent.
But is it relevant, a deeper question has to be the way government authorities, central banks deal with the chaos dealt by faltering growth numbers.
Globally this current selloff started as a repricing of growth outlooks, in the main based on believable or unbelievable numbers out of China, mounting evidence of economic weakness in the worlds second largest economy, coupled with persistent low growth in Europe and Japan, made it hard for markets to ignore the impact on earnings and profitability of what looked suspiciously like a global slowdown.
The selloff accelerated as fears spread that policy makers may not be able to respond sufficiently quickly and effectively. Part of this worry had to do with the extent to which central banks have depleted their ammunition storesafter years of carrying the bulk of the policy burden. But a more significant concern arose from the correct realization that the primary response would have to come from the emerging economies that are the source of the growth and financial concerns this time, and not from the Federal Reserve and the European Central Bank.
As is often the case, the selloff further gathered steam when traders realised that policy circuit breakers would not materialize immediately. The rout became disorderly when classic deleveraging technical forces, including forced generalized selling by volatility-sensitive investors and over-extended portfolios, took hold of the markets. The result was the conventional mix of price air pockets, valuation overshoots and contagion. Bargain hunters contributing largely to the ups, and bears bailing will likely see the volatility continue through this week, however, the crash or correction question will likely take months to answer.
These typical stages of a market selloff generally exhaust themselves once prices come down sufficiently to create compelling bargains for sidelined investible funds. This tends to happen first for the best managed companies with resilient balance sheets, gathering steam, spreading to the investors in general.
There’s a lot of dry powder out there, including cash in the hands of households and business’ that can be deployed in investment purchases and stock buybacks, or punters simply looking for higher-return opportunities.
Longer-term asset price stabilisation might also come from a reinforcement of the markets’ economic and policy underpinning. But with economic growth consistently failing to take off, this responsibility has fallen in the recent past mainly to central banks, the system’s traditional core. This time, however, genuine and durable stabilisation will require that a good part of the solution come from the emerging world.
Given the economic and political challenges in many of the important emerging economies, it will take time for growth to come back strongly and for comprehensive policy solutions to emerge. These could include the deepening of structural reforms, the rebalancing of aggregate demand or the lifting of pockets of over-leverage and over-indebtedness.
As a result, the best that can be hoped for right now is short-term market stabilisation through another series of liquidity-driven Band-Aids. This approach would provide much-appreciated immediate relief; but it wouldn’t be sufficient to deliver the longer-term anchor of stability that the global financial system is searching for.
China Cuts Interest Rates by 0.25 Percentage Points
China’s central bank has cut its benchmark interest rates and the amount of cash banks must keep on hand in a bid to boost the world’s second-largest economy as it battles a collapse in share prices. The People’s Bank of China (PBOC) said on its website that it would lower the one-year bank lending rate by 25 basis points to 4.6 per cent, effective from today.
The move came as Chinese stock indexes nosedived more than 7 per cent to hit troughs not seen since December, and after shares had plunged over 8 per cent on Monday. The latest policy easing also followed a shock devaluation in the yuan two weeks ago, a move that authorities billed as aiding financial reforms, but that some saw as the start of a gradual slide in the currency to help stumbling exporters.
“Frankly this shows a bit of panic in my mind,” resident economist at Beijing’s Conference Board, Andrew Polk, said. “This is a big-bang move. It’s meant to address some real issues and also prevailing market sentiment over the past two days.”
One-year benchmark deposit rates were also reduced by 25 basis points, while the ceiling for deposit rates with tenures of over a year were scrapped to further free up China’s interest rate market. At the same time, the PBOC said it would also lower the reserve requirement ratio by 50 basis points to 18 per cent for most big banks. The change will take effect on September 6.
Some analysts welcomed the moves as overdue, but warned it may not be enough to shield China from a slowdown that many suspect is much sharper than official figures suggest.
“Further monetary policy easing by the PBOC is still on the cards,” economists at ANZ Bank said in a note.
Chinese premier Li Keqiang said there was no basis for the yuan currency to weaken further and the exchange rate would be maintained at a “basically stable” level, state media reported. The exchange rate would be kept “basically stable at an adaptive and equilibrium level”, Mr Li was quoted as saying.
Mr Li described the move by the PBOC to devalue China’s currency as an “appropriate response” to developments in international financial markets, Xinhua reported.
“Such adjustment was also made as part of China’s ongoing reform efforts,” Mr Li said.
European Markets Surge After ‘Black Monday’
European stock markets roared back into the black, with most indices regaining much of the steep losses suffered the previous session on fears of a slump in China’s market. In Tuesday trading London’s FTSE 100 index was up 3.09 per cent, the CAC 40 in Paris rose 4.14 per cent and the DAX 30 in Frankfurt climbed 4.97 per cent.
The trio had closed 4.67, 4.7 and 5.35 per cent lower respectively on Monday amid a global stock sell-off that wiped billions of dollars from equity markets.
Despite the bounce-back in Europe as traders hunted for bargains, many market-watchers warned of continuing volatility marked by successive rises and falls as focus returns to economic fundamentals — and ongoing doubts about China in particular.
“We are seeing signs of relief with European stocks opening higher despite China extending its losses,” said Piotr Matys, an emerging markets expert at Rabobank in London. “We are trying to decouple but I think it’s too early to declare the worst is over, the way I see it is that this is a bit of a technical correction after things got a bit oversold.”
Valentijn van Nieuwenhuijzen, head of multi-asset strategy at NN Investment Partners, agreed Monday’s market moves had gone too far.
“There are solid reasons to be worried about the global growth outlook, however, it is a risk — not yet a reality — and… Europe, US, Japan all show domestic demand is holding up quite well so far,” Mr van Nieuwenhuijzen said.
Hard Landing Still Predicted for China
China’s currency devaluation and a near-collapse in its stock markets in recent months have sparked fears that the country is at risk of a hard landing that will hammer world growth and send world markets into a tailspin. A private survey showed activity in China’s factory sector shrank at its fastest pace in almost six-and-a-half years in August as domestic and export demand dwindled, adding to worries that the economy may be slowing sharply.
And to further complicate China’s monetary policy, the steady fall in interest rates could hasten capital outflows and further drag on the yuan, at a time when authorities have publicly vowed to prevent the currency from sharp falls.
China’s economy grew an annual 7 per cent in the second quarter, steady with the previous quarter and slightly better than analysts’ forecasts, though further stimulus is still expected. The government has in recent months rolled out a flurry of steps to try to put a floor under the economy, including repeated cuts in interest rates and bank reserve requirement and faster infrastructure spending.
But analysts believe the government may have to keep up its policy stimulus during the rest of the year to combat headwinds and achieve its full-year growth target of around 7 percent.
Wall St Gives-up Early Gains
It was been another volatile night of trade on Wall Street, with markets suffering the biggest one-day reversal since the 2008 crisis. After staging a sharp rally at the open, rising more than 2 per cent, stocks fell into the close. The Dow Jones ended 1.3 percent lower at 15,666, after seeing a swing of 662 points. The S&P 500 also gave up earlier gains to close 1.4 per cent lower at 1,868.
Bargain hunters drove markets sharply higher early on, but enthusiasm waned in late trade on niggling concerns that a slowdown in China could hobble global growth.
Walt Disney and Apple were the only stocks on the Dow Jones to recoup any of yesterday’s losses, both rising 0.6 per cent. Investors were buoyed midway through trade with the release of a much stronger than expected jump in consumer confidence, rising from 91 to 101.5, and a 5.4 per cent rebound in US home sales in July. The data helped investors momentarily shrug off China’s second slump in two days.
The Shanghai index finished 7.6 per cent down yesterday. The People’s Bank of China also cut the amount of cash large banks have to hold by 50 basis points to 18 per cent, which will release an estimated 650 billion yuan $US150 billion into the banking system.
It is a sign that China’s authorities are maturing said NAB senior currency strategist Emma Lawson.
“It is a positive step that Chinese policy makers have chosen to address the economy rather than prop up the equity market directly,” Ms Lawson said.
The rate cuts in China calmed commodity markets overnight, although gains remained limited.
After falling more than 6 percent yesterday, Brent crude in London picked up slightly to $US42.87 a barrel. West Texas crude followed suit rising to $US39.10 a barrel. Gold continued to fall though $1,139.90 an ounce. Iron ore remains surprisingly resilient at $US53.30 a tonne. The Australian dollar lost almost 1 cent overnight against the greenback, and was buying 71.35 US cents.
White House Urges Calm After ‘Overreaction’
Many US analysts have been playing down the significance of the slump.
“I think this was a bit of an overreaction,” said Wells Fargo strategist Scott Wren. “We know that the devaluation on August 4th, that lit the fuse and then last week’s PMI for China coming in below 50 and below expectations kind of set the bomb off, and so I think we’ve seen an overreaction to fears of a global slowdown.”
Yesterday the US president also weighed into analysis of the markets, with White House spokesman John Earnest talking up the nation’s economic recovery.
“If you take a look at the most stable components of growth – a combination of personal consumption and fixed investment – we’ve seen that those two measures of economic growth have increased 3.2 per cent over the last year,” he told reporters at a daily briefing. “That’s actually faster than the growth of the overall economy, which is an indication of how durable the US economy continues to be.”
Australian treasurer Joe Hockey also moved to reassure Australians about their economy and that of their largest trading partner.
“The fundamentals are still strong in China. It’s a massive economy with a growing population,” Mr Hockey told Channel Nine. “I am absolutely confident that the fundamentals of the Australian economy and the global economy are still good … without doubt that is the situation. The world is coming together to deal with these with these sorts of issues.”
However, traders do not seem set to heed the message, with futures trade on the Australian market pointing to ugly days ahead.
RELATED! Australian Bank shares may still have some way to fall according to Morgan Stanley
Despite having fallen around 24 percent since the end of March ’15, Australia’s big four banks could still be a fair way off bottoming out according to investment bank Morgan Stanley. In a research note, Morgan Stanley’s highly rated bank analyst Richard Wiles found that, while the banks’ valuations were no longer elevated, they still imply a relatively low probability of an economic downturn or dividend cuts.
On Morgan Stanley’s figures the banks’ share prices were still, on average, 12 per cent above its “bear case scenario”. That’s based on yesterday’s closing share prices, before Australia’s major banks rallied strongly today.
By noon yesterday Westpac had rallied 4.7 percent from yesterday’s close, NAB 4.3 percent, ANZ 3.7 percent and CBA 3.5 percent.
“Our bear case does not specifically assume recession, but it does capture a scenario where downside risks are higher,” Mr Wiles said.
Morgan Stanley had already assumed a base case where more onerous capital requirements, low earnings growth and flat dividends weigh heavily on the banks’ share prices. A significant part of Morgan Stanley’s “bear case” scenario is the belief that the banks’ provisions for bad debts and impairment charges are too optimistic. Morgan Stanley forecast the ratio of loan losses to the total loan book will increase from 0.2 per cent to 0.25 per cent next year, but could double to 0.4 per cent in its bear case scenario.
“However, a setback to global and domestic growth expectations could lead to a higher probability of our bear case scenario playing out,” Mr Wile warned. “However, we think loss rates would materially exceed these levels if there was a recession.”
UNRELATED! Australia to Sign-up For China-based Asian Infrastructure Investment Bank
The Australian Federal Government will sign a memorandum of understanding that will allow Australia to participate in negotiations to set up the $100 billion China-led Asian Infrastructure Investment Bank – AIIB.
The Beijing-based bank was launched late last year and is designed to help finance development projects like road, rail and power infrastructure in the rapidly growing Asian region.
More than 20 countries have signed on as founding members.
In the past month, major Western powers including Britain, France, Germany and Italy have also announced their intention to join.
Australia had resisted joining, but a joint statement from Prime Minister Tony Abbott, Foreign Affairs Minister Julie Bishop and Treasurer Joe Hockey said the Government would sign the MOU that would allow Australia to participate as a prospective founding member :: Read the full article »»»»
UNRELATED! Sweeping Changes to China’s Radical Laws, One Child Policy Eased, Labour Camps Abolished
China has unveiled sweeping changes to some of its most controversial laws including its one-child policy and its forced labour camps. The major policy shift also includes reductions on the application of the death penalty, reforms to a widely abused “petition” system and changes in a residency registration scheme.
The changes, revealed by the official Xinhua news agency, were announced days after a meeting of the country’s top Communist Party leaders.
Couples will now be allowed to have two children if one of the parents is an only child, significantly widening the exceptions to a rule introduced in 1979 to control China’s then exploding population, now the world’s largest.
The one-child policy is controversial both within and outside China, the policy has at times been brutally enforced, with authorities relying on permits, fines and in some cases forced sterilisations and late-term abortions, often triggering public outrage :: Read the full article »»»»
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