Friday, 28 August 2015

Markets rally after stocks become cheaper

The Shanghai Composite Index jumped 5.3 percent on Thursday. Government buying was suspected to have been behind the rally.

The market rally in China helped shares gain elsewhere as well. In the US, the S&P 500 jumped 2.4 percent, capping a two-day gain of 6.4 percent, the best since the bull market began more than six years ago.

Some analysts think there could be more volatility ahead. JPMorgan Chase & Co. derivatives strategist Marko Kolanovic warned that “price insensitive” program traders are likely to cause repeated selloffs in coming days.

However, other analysts think the worst may be over.

“We got our pullback, and now we’re going to focus on U.S. things like GDP and the Fed,” said John Canally, chief economic strategist at LPL Financial Corp. in Boston. “When you’re in a correction, it’s not fun, but when you’re out, you can refocus on what matters.”

Lower prices could help stocks rally further.

Stocks are “screamingly attractive”, according to Tobias Levkovich, Citigroup’s chief US equity strategist.

Jonathan Golub, chief strategist at RBC Capital Markets LLC, told Bloomberg: “Those things that you probably liked before you should like now at cheaper prices.”

In any case, Laszlo Birinyi thinks that valuation metrics such as the cyclically adjusted price-earnings ratio championed by Robert Shiller have underestimated the perfomance of stocks. Rather, sentiment is as likely to drive prices as anything else.

“Our bottom line is that many market metrics and indicators are based on a cyclical environment which no longer exists,” he wrote in a note to clients on 5 August.

Thursday, 27 August 2015

Chinese stocks fall again but US stocks rebound

Chinese stocks fell again on Wednesday, the Shanghai Composite Index ending down 1.3 percent after a rocky session.

However, US stocks finally halted its decline on Wednesday. The S&P 500 jumped 3.9 percent to end its six-day slide.

The rebound came as New York Fed Bank President William Dudley said on Wednesday that the market upheaval has reduced the case for raising rates in September.

Still, the market may face more turbulence ahead.

Tom Manning, chief investment officer at Boston Private Wealth, was quoted by Bloomberg as saying: “I don’t know that we found the bottom. I’m not convinced we don’t have more negative days to follow. We’re not likely to go from extreme volatility to extreme calm overnight.”

Wednesday, 26 August 2015

Chinese stocks plunge again, US rebound fails

Market turbulence continued on Tuesday.

Chinese stocks plunged again. The Shanghai Composite Index tumbled 7.6 percent on Tuesday, falling below the 3,000 level for the first time in eight months and extending the decline over the past four days to 22 percent.

In response, China is cutting interest rates. The People's Bank of China announced that it will cut the one-year lending rate by 25 basis points to 4.6 percent effective Wednesday and the one-year deposit rate also by 25 basis points to 1.75 percent. The required reserve ratio will be lowered by 50 basis points.

The move helped boost European stocks. The STOXX Europe 600 jumped 4.2 percent on Tuesday, the biggest gain in four years.

The PBC's move also initially boosted US stocks. The S&P 500 was up 2.9 percent at one point on Tuesday, only for late selling to push the index down 1.4 percent at the close.

Tuesday, 25 August 2015

US stocks in correction, may still “come out OK”

The S&P 500 fell 3.9 percent on Monday.

The decline left it 11 percent below its high in May, putting it in correction territory.

The market did rebound from an early plunge, only to face renewed selling in the afternoon.

Some analysts remain optimistic though.

“As prices go lower, we see selective opportunities to buy as opposed to a provocation to become more bearish,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

“When the issues are on the table, the market will do what it has to to adjust and come out OK on the other end,” said Laszlo Birinyi, the president of Birinyi Associates.

Indeed, historically, data from Bespoke Investment showed that following a 5 percent decline, the market is on average relatively flat the next week, up 1.65 percent over the next four weeks, and up close to 5 percent over the next 12 weeks.

Monday, 24 August 2015

Stocks face risk of steep losses

After the market turmoil last week, there could be more to come.

Global stocks fell last week, with the MSCI All-Country World Index falling 5.4 percent. Even the usually-resilient United States stock market was not spared, with the Standard & Poor's 500 Index falling 5.8 percent.

This week has started off no better. China, which triggered off the market turmoil by devaluing the renminbi on 11 August, is rocking markets again as the Shanghai Composite Index plunged 8.5 percent on Monday, the most since 2007 and erasing its gains this year.

Indeed, some analysts were expecting more declines even before trading started this week.

In a telephone interview with Bloomberg on Sunday, Doug Ramsey, chief investment officer of Leuthold Weeden Capital Management LLC, said that losses in the S&P 500 could reach 20 percent.

“It’s going to be pretty deep,” Ramsey said.

While the recent maket declines had been triggered by China's currency devaluation, Ramsey had already turned cautious in late 2014 as market breadth weakened and US stocks in October suffered what was at the time the worst rout since 2011. He turned all-out bearish at the start of August after the S&P 500 hit a record high in May but gauges of breadth, transportation stocks, utilities and corporate bonds failed to keep up with it.

John Hussman sees even deeper losses in store for the US stock market. In his latest commentary, he said that “we fully expect the S&P 500 to decline by 40-55% over the completion of the current market cycle”.

While Hussman sees market overvaluation as the primary driver of the extent of the losses over the long term, he, like Ramsey, sees the on-going weakness in market internals as a sign of vulnerability to sharp corrections.

In addition, Hussman noted that on Friday, both the Dow Jones Industrials and Dow Jones Transports jointly broke the initial correction lows that followed their joint bull market highs. According to his interpretation of Dow Theory, this means that “the major trend has turned negative”.

Hussman concluded: “Last week's market loss was initial and quite contained from the standpoint of current valuations. My view is that under the market conditions we presently observe, investors face the continued potential for steep, vertical losses.”

Saturday, 22 August 2015

Markets plunge again

The trading week ended with more turbulence as global stock markets plunged on Friday.

The MSCI All-Country World Index tumbled 2.7 percent to the lowest since October. The S&P 500 plunged 3.2 percent, the most since November 2011. The Stoxx Europe 600 Index lost 3.3 percent.

The MSCI Emerging Markets Index fell 2.2 percent. The Shanghai Composite Index plunged 4.3 percent.

Hong Kong’s Hang Seng Index fell by a relatively sedate 1.3 percent. However, it has declined more than 20 percent from its April high, taking it into a bear market.

In other markets, junk bond yields rose to the highest since October 2012, US Treasuries completed the largest weekly gain in five months, and oil fell below $40 a barrel for the first time since 2009.

Friday, 21 August 2015

Stocks plunge, some analysts remain optimistic on US market

Stocks fell sharply on Thursday.

The S&P 500 tumbled 2.1 percent to its lowest level since February, breaching its 200-day moving average and erasing its gain for the year in the process. Earlier on Thursday, the Shanghai Composite Index plunged 3.4 percent while the STOXX Europe 600 fell 2.1 percent.

In emerging markets, the MSCI’s Emerging Markets Index fell 1.2 percent to the lowest level since 2009 and Kazakhstan abandoned its currency peg a day after it let the tenge fall 4.5 percent against the US dollar.

Despite the selloff on Thursday, some analysts remain sanguine on US stocks.

Bloomberg reports that, while unlike in recent times, the S&P 500 failed to immediately recover after falling below its 200-day moving average, “money managers like Tom Mangan ... say it will”.

Also, the volatility index has moved too fast. The VIX closed at 19.14 on Thursday, higher than every contract predicting its future path through April of next year. This, according to Scott Maidel at Russell Investments, shows that speculators think the volatility gauge has risen too far, too quickly. An expected reversion of the VIX typically means that equities will rise.

Finally, the US stocks selloff will “be relatively short-lived in the U.S. because the domestic fundamentals are simply better,” according to Jim Russell, a portfolio manager at Bahl & Gaynor Inc. “It should be confined to a few percentage points.”

Thursday, 20 August 2015

Most stocks fall even as Chinese stocks rise on suspected government support

Markets were mostly down on Wednesday. The S&P 500 fell 0.8 percent. The STOXX Europe 600 fell 1.8 percent.

The falls were mostly attributed to concerns over China, although Chinese stocks themselves finished the day up. The Shanghai Composite Index rose 1.2 percent on Wednesday, in the process rebounding from a plunge of more than five percent earlier in the session.

Government support was suspected for the rebound. “Only the 'national team'... would be able to turn the tide like this,” Yingda Securities analyst Li Daxiao said.

Indeed, some analysts think that 3,500 may be the level around which government support appears. From Bloomberg:

Signs of government buying have appeared at that level on the Shanghai Composite Index at least four times over the past six weeks. The latest example came on Wednesday, when the gauge posted an intraday rally of 6.6 percent after falling to as low as 3,558.38.

That could make the 3,500 level a make-or-break one. As Nelson Yan, chief investment officer at the Hong Kong unit of Changjiang Securities Co. said: “Any inaction could trigger a new round of selling.”

Wednesday, 19 August 2015

Japanese monetary policy not working, more fiscal stimulus may be needed

Japan’s real gross domestic product fell at an annualised rate of 1.6 percent in the April-June quarter, ending two quarters of growth. This was despite massive monetary stimulus by the Bank of Japan.

The main problem with the monetary stimulus, though, is that little of it is actually reaching the real economy. From Bloomberg:

The money multiplier, a gauge of activity generated when the central bank eases, fell to 3.92 last month, the lowest in data dating back to 2003. That’s even as BOJ debt purchases of as much as 12 trillion yen ($96 billion) a month caused the monetary base to balloon about 150 percent...

“Money isn’t flowing into the real economy, it’s just moving between the BOJ and banks as Japanese government bonds are transferred to the BOJ’s excess reserves,” said Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co. “The main spill-over effect from the unprecedented easing is to lower long-bond yields and a weaker yen.”

As a result, more government spending may be needed. From another Bloomberg report:

Japan needs an economic injection of as much as 3.5 trillion yen ($28 billion) to shore up consumption and stave off a further economic contraction, said Etsuro Honda, an economic adviser to Prime Minister Shinzo Abe.

“Households feel their income has been reduced,” Honda, 60, said in an interview Tuesday at the Prime Minister’s Office in Tokyo. “The negative legacy of the previous tax hike is waning, but increases in wages are lower than expected and prices of food and daily commodities are rising.”

Tuesday, 18 August 2015

US stocks gain but Japanese stocks may be better buy

US stocks rose on Monday.

The S&P 500 gained 0.5 percent to 2,102.44 as a report on Monday showed that the National Association of Home Builders/Wells Fargo housing market index rose to 61 in August, the highest since November 2005, from 60 in the previous two months.

However, longer term, there may be little upside potential left for US stocks, according to Goldman Sachs.

Goldman thinks that the S&P 500 will end the year at 2,100, about the same as Monday's close. Its 12-month target for the S&P 500 is 2150, about a three percent gain from current levels, and its target for 2017 is 2300, about a 10 percent gain from current levels.

Indeed, some analysts think that Japanese stocks have greater potential than US stocks. From Bloomberg:

Investors in American stocks face the likelihood the Federal Reserve will tighten policy next month. The Standard & Poor’s 500 Index commands a valuation premium to the Topix even though it has one of the lowest returns this year among developed equity markets. BlackRock and Baring Asset say buying Japan and selling U.S. shares is the only logical conclusion.

Monday, 17 August 2015

RMB daily fix steady

After a volatile past week, the renminbi appears to be stabilising.

After falling 2.9 percent last week to 6.3918 yuan per US dollar, the People’s Bank of China set its daily reference rate for the renminbi at 6.3969 on Monday, up from Friday’s close in Shanghai.

For all the turbulence caused by the renminbi's devaluation, Chinese stock markets actually did well last week. The Shanghai Composite Index ended the week up 5.9 percent while Shenzhen Composite Index rose 6.1 percent.

Elsewhere, the S&P 500 gained 0.7 percent last week but the STOXX Europe 600 fell 2.7 percent and the Nikkei 225 edged down 0.1 percent.

Friday, 14 August 2015

RMB value up but Asian currencies hit this week by devaluation

Markets finally got a respite from Chinese devaluation turmoil as the renminbi's daily fix was raised by 0.05 percent on Thursday after three consecutive cuts of more than 1 percent each.

Still, the devaluation of the renminbi so far has left Asian currencies headed for the worst week since 2008, according to Bloomberg, with Malaysia’s ringgit and Indonesia’s rupiah in particular falling to 17-year lows:

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, retreated 2.1 percent from Aug. 7, poised for its biggest weekly drop since October 2008. The ringgit slumped 4.3 percent, the yuan sank 3 percent, the rupiah fell 1.8 percent, while India’s rupee weakened 2.1 percent. Vietnam’s dong slid 1.3 percent after the central bank widened the currency’s trading band Wednesday.

Thursday, 13 August 2015

US stocks rebound but China devalues for a third day

US stocks managed to turn the tide in the global market sell-off as the S&P 500 rose 0.1 percent on Wednesday. The index had been down 1.5 percent earlier in the trading session.

Earlier in the day, the STOXX Europe 600 fell 2.7 percent, the Nikkei 225 fell 1.6 percent and the Shanghai Composite Index fell 1.1 percent.

There could be more volatility in markets on Thursday after China devalued the renminbi for the third consecutive day. This time, the RMB's daily fix was cut 1.1 percent to 6.401 per US dollar.

Meanwhile, echoing somewhat the views of fellow columnist Frances Coppola, Roger Aitken wrote in a Forbes article on Wednesday that China's debt-GDP ratio looks ominous.

Comparing the debt statistics for emerging economies, he noted: “Not only does China head the top 10 rankings for the absolute level of debt to GDP, the 5-year change in terms of total debt percentage to GDP stands at 47%-points for the country -ahead of Thailand and Brazil (both 27%) by a country mile.”

Wednesday, 12 August 2015

China devalues RMB but still at risk of hard landing

Greece and its international lenders reached an 85 billion euro bailout agreement on Tuesday.

However, markets on Tuesday were mostly focused on China's RMB devaluation, which saw the People's Bank of China push its daily fix against the US dollar to 6.2298 from 6.1162 the day before. This lowered the value of the RMB by 1.9 per cent, its biggest one-day change since 1993.

It followed up the move with another 1.6 percent devaluation on Wednesday.

The devaluation comes just days after China reported that its exports fell 8.9 percent in July from a year earlier.

The devaluation jolted global markets on Tuesday. The S&P 500 fell 1.0 percent while the STOXX Europe 600 fell 1.6 percent. Oil and metals prices also fell sharply and bond yields declined in the US and Europe.

While markets appear to have been caught off-guard by the move, Francis Coppola thinks that the devaluation had become almost inevitable.

In an article for Forbes, Coppola wrote that there has been a growing divergence between the RMB’s “central parity” and the RMB’s market rate. Maintaining a higher parity than the market wants is costly and has forced China to unload its foreign reserves “at a rate of knots” to support its currency.

Furthermore, with July's “dismal” export figures, Coppola thinks that China has actually been too slow to devalue and that this may prove costly. “Even with this devaluation, and probably more to come, China is set for a very hard landing”, she wrote.

And to Coppola, this in turn means that Fed interest rate rises look unlikely. “Raising interest rates when the dollar is strong, the economy weak and China on the verge of a nasty crash would be unbelievably foolish”, she wrote.

Tuesday, 11 August 2015

Stocks rally but could be heading into period of weakness

Stock markets started the week strongly.

The gains came early. In China, the Shanghai Composite Index jumped 4.9 percent on Monday on speculation that the government will start a new round of consolidation among state-owned companies.

Europe followed with the STOXX Europe 600 Index rising 0.7 percent.

In the US, the S&P 500 rose 1.3 percent while the Dow Jones Industrial Average climbed 1.4 perent to end its longest losing streak since 2011.

However, JPMorgan Chase's technical analysts think that investors should not get too excited about the latest rally. From Bloomberg:

The bank's Jason Hunter and Silvia Seceleanu have a note out saying that the tight trading range in which the U.S. equity market has been trapped this year could give way to a period of weakness heading into the fall.

They point to recent declines in consumer-discretionary and health-care stocks as a bearish signal, since the market-leading groups were the last two major industries to hang onto bullish price trends.

Monday, 10 August 2015

US stocks fall, “huge disaster waiting to happen”

Stocks were mixed last week.

Stocks fell in the United States. The Standard & Poor’s 500 fell 1.3 percent last week. The Dow Jones Industrial Average in particular lost 1.8 percent, falling on Friday for a seventh consecutive day to a six-month low.

In contrast, Chinese stocks rose last week. The Shanghai Composite Index rose 3.3 percent. That still left it 27.5 percent below its peak in June though.

European stocks also rose last week. The STOXX Europe 600 rose 0.2 percent.

David Stockman, the former director of the Office of Management and Budget under US President Ronald Reagan, thinks that the US stock market will fall further.

“I think it's pretty obvious that the top is in,” Stockman told CNBC last week.

“The whole global economy since 2008 has been driven forward by this massive investment and construction and borrowing spree in China,” said Stockman. “The point that I'm making is that it's over.”

Stockman also said that the credit-fuelled expansion in the economy driven by the Federal Reserve is over. “We are in a new era,” said Stockman. “It's a huge disaster waiting to happen.”

Thursday, 6 August 2015

Emerging markets lag

Emerging markets are supposed to provide higher returns at the cost of higher risks. The returns in recent years, however, have not been at all impressive.

From Bloomberg:

The numbers are certainly sobering. All told, developing-nation currencies have fallen to their lowest levels since 1999, and bonds denominated in those currencies have wiped out five years’ worth of gains.

Meantime, in the stock market, the emerging world and developed one are diverging sharply. Since 2009, the MSCI index has fallen 10 percent while developed markets have soared about 50 percent. Based on estimated price-to-earnings ratios, the emerging markets are trading at their biggest discount to developed ones since 2006 -- 31 percent.

Wednesday, 5 August 2015

China's stock market could re-rate, real estate could slow significantly

Despite the recent turbulence in the Chinese stock market, some analysts remain bullish on Chinese stocks.

For example, a report from Bloomberg cites Societe Generale SA’s Asia equity strategist Vivek Misra as saying that the Shanghai Composite Index will rally 40 percent by the end of 2016.

“Chinese shares have the potential to re-rate,” Misra reportedly said.

However, for the health of the Chinese economy, the real estate market may be more important than the stock market.

Another Bloomberg report cites Barclays as saying that China's investment/GDP ratio is much greater than that in other emerging markets such as India and Brazil, as well as developed economies such as the US, and that real estate accounts for most of this increase.

"The outlook for the real estate sector remains the most important and the medium term path seems clear – a continued, multi-year slowdown of very significant proportions but not an imminent collapse," Barclays concluded.

Tuesday, 4 August 2015

China's stock market rebounds but at risk of century's "greatest equity market correction"

China's stock market rebounded on Tuesday from a three-week low. The Shanghai Composite Index rose 3.7 percent after falling 4.4 percent over the previous three trading days.

Earlier on Tuesday, several Chinese brokerages temporarily stopped short selling by clients after the Shanghai and Shenzhen exchanges introduced a measure requiring investors who borrow shares to wait one day to repay the loans.

Despite the rebound today and the official measures taken so far to stop the market fall, Scott Minerd of Guggenheim Partners said in a commentary last week that the current Chinese equity market correction could turn into a stock market plunge similar to what happened in the United States in 1929.

According to Minerd, "the Chinese stock market is still grossly overvalued" while margin debt remains "sky-high".

He warned that "at this point investors should take note that the world’s second-largest economy could...find itself at the epicenter of this century’s greatest equity market correction".

Monday, 3 August 2015

US stock market narrowing as other markets crash

Ron Insana thinks that US stocks could be headed for a correction.

Let's face it: With, or without, government intervention, the Chinese market is crashing...

Commodities have crashed...

And while U.S. markets are not terribly far off their highs, and have traded in an extremely tight range this year, the technical deterioration in U.S. stocks has been, literally, "breadth-taking."

Market leadership has been provided by only a handful of stocks, while everything from high-flying biotech stocks, to oil and gold shares, are providing leadership on the downside...

Add to those concerns the likelihood of a rate hike from the Federal Reserve...and I would recommend taking profits and putting on some protective hedges against a long-only portfolio.

A report from MarketWatch also highlighted the narrowing breadth of the market.

The lion’s share of gains that have been racked up by the S&P 500 so far this year come mainly from two sectors: health-care and consumer discretionary stocks. In fact, five out of the index’s 10 main sectors are nursing year-to-date losses...

Indeed, the chart of the equal-weighted S&P 500 shows that average stocks are trending lower...