INV: Chinese Economy Slows; Investors Losing Confidence
Wake UP!!! China goes OFF the edge overnight, plunging to a 13 month low as investors have become so unnerved that they now expect ‘capital outflow’ ($1 tril worth in 2015 vs. $140 bil in 2014) to only accelerate as their economy continues to go thru ‘the change’. The Shanghai index fell 6.4% even as the PBoC pumped 440 bil Yuan ($67 bil) into their economy overnight as policy makers are at a loss……
[Capital Outflow – is the movement of assets (in this case Yuan’s) out of the country when investors fear instability – political or economic. Investors SELL their assets and then take the money and invest it somewhere else.]
This is not good for China or the Chinese mkt. Fear over a bigger slowdown than what is expected and fear over what the FED may say or do, fear over weaker oil prices all caused mkts to implode – not a single sector was spared, investors afraid of a liquidity freeze – calls for the index to fall another 15% are now common (look when it gets this bad – there is no stopping it until there is capitulation and real panic, so hold on).
Wu Kan – a fund manager in Shanghai put it this way: “It’s an issue about confidence and there’s no confidence in the market now, the depreciating yuan and slowing economic growth have been haunting the market for a while.”
BINGO! It’s all about confidence (and that is true in ALL mkts). Confidence in the mkt, confidence in legislators, confidence in the gov’t, confidence in the economy, confidence in leadership… That mkt has lost more than 45% since June as the economy slows and investor lose ‘confidence’. (The last time investors lost confidence was during the GFC (Great Financial Crisis) and the Chinese mkt lost 67%.
Dai Ming of Hengsheng Asset Management who has been selling stocks added that:
“The pressure for capital outflow and the yuan’s devaluation is still quite big, we haven’t seen signs of a pickup in the economy and the first and second quarters could be challenging.”
And so it goes…..China now enters the drain after having been circling it for months now…… Japan -2.35%, Hong Kong – 2.48%, China -6.4% and ASX – bucked the trend and rose by 1.84%.
In Europe this morning – mkts there are being dragged lower as well…. Carmakers, luxury stocks, miners, banks all sharply lower while Gold and other precious metal rose as investors looked to park money in ‘safe haven’ assets. I guess all that jawboning that Uncle Mario did last week to excite the mkts was…… short lived?
[Safe Haven assets are investments that are expected to retain or even increase in value during times of stress or turbulence]
There are though, pockets of strength (bright spots) as investors do reward companies that surprise on earnings reports and guidance. This morning Siemens AG is up 6.3%, Royal Phillips, NV is +4.2% and TalkTalk Telecom is up 6% as all 3 reported better profits, guidance or new global agreements. Do not expect the action to really improve much here either as investors now await the FED press conference.
FTSE -0.72%, CAC 40 – 0.53%, DAX – 0.52%, EUROSTOXX -0.41%, SPAIN -0.38% and ITALY -0.41%
So yesterday US stocks had another tough day…..reversing the gains from Thursday and Friday last week to give most of it back……Crude oil – again turning lower as both mkts test for a bottom…. As I said yesterday – I would expect stocks to test the 1850 range again and then bounce on the back of the FED announcement, but would not be surprised if it failed and tested the most recent lows of the 1820’s. As you can imagine – all eyes and ears will be on Janet Yellen tomorrow – traders and investors will place their bets today as the chatter consumes the mkts. How will she acknowledge that the US (and global) economics have changed without sounding the alarm bells?
Remember – they raised rates by 0.25% in December and Stanley Fischer – Vice Chair – reminded us that 4 more hikes “were in the ballpark for 2016” …but since the FED raised rates US stocks have taken a beating (let’s just put the others aside for now) …. the S&P fell over 11%, the Dow fell over 13% and the Nasdaq lost 8%, Oil is down by more than 16% and global mkts are in crisis – with many of them in clear BEAR mkt territory.
This is going to be a real challenge for Janet as she takes a seat on the world stage tomorrow afternoon. She has to convince investors that we should remain ‘optimistic’ about US growth while she must acknowledge recent mkt action and the possible negative impacts it can surely have…. It’s called ‘Smoke and Mirrors’! You see all they need to do is change a couple of words and hope that they don’t get called out on it!
Last month she said that the ‘economy expanded at a moderate pace’…..well this month she might say that ‘the economy seems to have moderated a bit’…..this way it does not scream FIRE but it sends a dovish message. Recall that retail sales were a disappointment in December – just when they told us how strong the consumer was and that household spending had been ‘increasing at solid rates…’ we found out that maybe that wasn’t so true……….so tomorrow she might say that ‘the consumer appears to remain confident yet cautious’ – again – it does not scream DRAMA – but sends the message.
The part about inflation will have to be massaged as well….St Louis Fed Pres Bullard said it succinctly last week –
“with renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome.”
So expect here to re-iterate the fact that ‘market based measure of inflation have moved lower and are expected to remain low’
In any case – no one expects any change in policy tomorrow and while she needs to keep the door open for March – I don’t expect it happen then either. I think her comments will be more dovish – like Uncle Mario’s – and that may be enough to stop the bleed -for now.
Apple (AAPL) is due to report after the closing bell today…. will Tim Cook be able to shed any light on what is going on in China and the Far East?
I am out beginning tomorrow for the rest of the week. I along with Michael Farr – Farr Miller & Washington and Yasmin Linday – CFA and Institutional Portfolio Manager at Fidelity Management will be speaking at the Naples CFA Society 2016 Annual Forecast Dinner on Thursday January 28th. See the link.
