Week End Blog – China Rules!

· by · in FINANCIAL MARKETS, MACRO. ·

How to start this Week End Blog? The picture below seems appropriate. After an already ugly end of last week, bears rushed back from the weekend to demonstrate their willingness to ‘SELL’. The Chinese and European ‘Monday Meltdown’ (I refuse to use the phrase Black Monday) were particularly impressive, with the Dutch AEX-index down almost 9.5%(!) intraday at one point. Overall, European equities lost 15% in less than 4 days. Chinese stocks did even worse. Between August 18th and August 26th stock prices collapsed by almost 30%. It was a correction long anticipated, but the speed at which it eventually hit, still surprised many.

Everything seems to be revolving around China these days. Equity market sentiment is heavily dependent on what’s going on in the world’s second biggest economy. After an impressive range of direct stock market interventions, China (re)turned to a more traditional easing measure this week. The country lowered interest rates. With little success, at first…

China’s stock market continued to fall, and the negative sentiment spilled over to other markets. The Dow Jones Index staged one of the biggest reversals since 2008, as the index fell more than 3% in the last hour of trading.

Last hour swings are becoming a trend! Chinese markets already showed some eye-catching moves in recent weeks, but the 6% rise in the last 50 minutes of yesterday’s trading compares to nothing else but ‘ madness.’

And last night, the S&P 500 Index did a 2% leap in its last hour of trading. I would like to see this trend continue, however. It makes watching stock prices far less time-consuming.

With everything that’s going on in China, it’s easy to forget other things do still matter. Like economic growth, for instance. The upward revision in U.S. GDP growth for Q2 should bring comfort. Especially since it was not solely based on (temporary) inventory building. Durable goods for July, already third quarter data, also looked pretty decent.

Macro data coming from the Eurozone were also upbeat. It may well be that Germany is increasingly dependent on China, just ask Volkswagen, but at this point German businesses remain confident. In contrast to expectations, the August Ifo-index reached the highest level in three months.

Eurozone money supply also came in higher than expected, underpinning that low interest rates help revive credit growth. Rising money supply growth could also be good news for European equities as some of the increase in liquidity reaches the stock market.

Risks still linger in the Eurozone, however. Low inflation is one of the biggest. Commodity prices have been under severe pressure for some time now. This is pulling inflation expectations down again, not to the liking of the ECB. Recent data show inflation is already falling again. Spain’s CPI fell 0.5% YoY in August, more than expected. Sounds of more QE are getting louder…

I am going to end this Week End Blog with something totally different, but also something very positive. Africa’s literacy rate has improved tremendously. Just so you know!

Thanks for reading the Week End Blog. Enjoy your weekend!

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