US stocks shrug off China plunge

What a contrast in performance by stock markets yesterday.

In China, stocks plunged, as AFP/CNA reports:

Chinese share prices slumped 6.5 percent Wednesday after taxes on share transactions were raised in the government's latest effort to curb the nation's booming stock markets, dealers said.

The benchmark Shanghai Composite Index, which covers both A- and B-shares listed on the Shanghai Stock Exchange, ended down 281.84 points at 4,053.09 on record turnover of 271.29 billion yuan (35.23 billion dollars)...

Dealers said the new tax measure, which saw a tripling of stamp duties on share trading from 0.1 percent to 0.3 percent, had an immediate psychological impact on investors, who chose to lock in their profits.

But in the US, stock indices made record highs. Reuters reports:

The Standard & Poor's 500 closed at its first record high in seven years on Wednesday after minutes from the Federal Reserve's latest meeting reassured investors about the economy's health.

As part of the broad-based rally in the U.S. stock market, the Dow Jones industrial average soared to its 25th record close so far this year, bringing a resounding end to a global equities sell-off sparked by a plunge in China's benchmark share index...

The Dow Jones industrial average shot up 111.74 points, or 0.83 percent, to close at a record 13,633.08, just off a lifetime intraday high of 13,636.09 set earlier in the session. This is the 47th record close for the Dow since October, when it first crossed 12,000.

The Standard & Poor's 500 Index jumped 12.12 points, or 0.80 percent, to finish at a record 1,530.23. At this level, the S&P 500 closed above its previous record of 1,527.46, which was set on March 24, 2000, in the waning days of the dot-com stock bubble. The Nasdaq Composite Index ended up 20.53 points, or 0.80 percent, at 2,592.59.

It is quite reasonable for other markets to downplay the significance of the fall in the Chinese market. After all, yesterday's action taken by the Chinese authorities was specifically directed at the local market. Combined with other measures already taken or to be taken, it may eventually put an end to the bull run there, but in the meantime stocks around the world will continue to be driven more by the liquidity that continues to flood markets.

Take money supply in the euro area for example. From Bloomberg:

M3 money supply, which the ECB uses as a gauge of future inflation, rose 10.4 percent from a year earlier, after increasing 10.9 in March,, the central bank said today. Economists expected growth of 10.7 percent, the median of 34 forecasts in a Bloomberg News survey shows. The rate of expansion in March was the fastest since February 1983.

This almost certainly means that the ECB will follow in the footsteps of the Norges Bank next month. From Bloomberg:

Norway's central bank raised its benchmark interest rate for the 10th time in two years to head of higher inflation as a mounting labor shortage boosted wage growth.

Oslo-based Norges Bank increased the deposit rate by a quarter-point to 4.25 percent today, as forecast by all 24 economists surveyed by Bloomberg, and reiterated rates would be raised "gradually."

However, the latest data from Japan have been somewhat more downbeat as industrial production fell by 0.1 percent in April while the NTC Research/Nomura/JMMA Purchasing Managers Index fell to 51.4 in May from 52.3 in April.