US stocks halt declines but emerging markets see asset selloff

US stocks ended a five-day fall on Tuesday with the S&P 500 edging up 0.1 percent.

However, the recent declines have left analysts less optimistic about US stocks. From CNBC:

Wall Street's consensus view remains that the market will close higher in 2015, expected to bounce after testing the year lows, but some strategists say the odds are growing that the market will end the year with losses.

Emerging markets face bigger concerns.

Bloomberg reported that investors sold $40 billion of emerging market assets in the third quarter, the fastest pace since the height of the global financial crisis.

A report from the International Monetary Fund released on Tuesday showed that corporate debt of non-financial firms in emerging markets rose to more than $18 trillion in 2014 from $4 trillion in 2004.

The report said that the "upward trend in recent years naturally raises concerns" and that "emerging markets should be prepared for corporate distress and sporadic failures in the wake of monetary policy normalization in advanced economies".

Glencore leads global markets down

Markets fell sharply on Monday.

The global market rout was led by a 29 percent plunge in the stock price of commodity trader Glencore, which pushed the Bloomberg World Mining Index to its lowest level in almost seven years.

The MSCI All-Country World Index fell 2.1 percent to its lowest level in two years. The S&P 500 fell 2.6 percent, bringing it just 0.8 percent away from its low from last month. The Stoxx Europe 600 fell 2.2 percent.

While stocks fell, government bonds rose. US 10-year Treasury yiels fell seven basis points to 2.10 percent while German 10-year bund yields fell six basis points to 0.59 percent.

In other markets, West Texas Intermediate crude futures fell 2.8 percent while the yen strengthened against all 16 of its major peers.

Bears dominate US stock trading

Bloomberg reports that bears are winning out when it comes to daily US stock trading.

Volume on days when the S&P 500 fell has been 27 percent heavier than when the index rose this month. That is about eight times the average gap in the past decade, according to data from Bloomberg and Bespoke Investment Group.

The bearish trend continued on Thursday with the S&P 500 falling 0.3 percent. That, though, still represented a rebound from a decline of 1.5 percent earlier in the day.

Some think the declines are likely to resume.

“We’re seeing down volume overwhelming up volume,” said Katie Stockton, chief market strategist at BTIG. “It’s one more check in favor of a retest of August’s lows.”

Others think the declines are nearing an end.

“You’re getting people piling on and selling on the downtrend,” said Aaron Clark, a portfolio manager at GW&K Investment Management. “That could get reversed pretty quickly. Given where valuations and fundamentals are, you’re more likely to be close to the bottom than another big leg down.”

China growth target likely to be cut but stocks may have seen the worst

Bloomberg reports that China is likely to further cut its target for economic growth next year.

Government leaders will announce a growth objective between 6.5 percent to 7 percent for 2016, according to eight of 15 economists in a Bloomberg News survey conducted Sept. 17-22. Four said they expect a 6.5 percent goal.

Still, Bloomberg reports that HSBC thinks further losses by Chinese stocks are limited after leveraged traders cut $218 billion of positions.

“We’ve seen the worst" for mainland stocks, said Steven Sun, Hong Kong-based head of China equity strategy at HSBC, who has a neutral position on yuan denominated shares. “The whole deleveraging process is largely over."

Markets fall, face more volatility, but emerging markets "looking attractive"

Global markets fell sharply on Tuesday.

The S&P 500 fell 1.2 percent and the STOXX Europe 600 plunged 3.1 percent.

Earlier on Tuesday, however, Asian markets held up better. The MSCI Asia Pacific excluding Japan Index lost 0.3 percent while the Shanghai Composite Index gained 0.9 percent.

Stocks may face further falls. Wells Capital Management chief investment strategist Jim Paulsen told CNBC on Tuesday that the S&P 500 could "head towards 1,800".

However, Russ Koesterich, BlackRock’s global chief investment strategist, said in a note on Tuesday that while it is too early to call a bottom to emerging markets and there could be more volatility ahead, valuations have become attractive.

“For investors with little or no exposure to this asset class, this may be a reasonable time to start slowly re-establishing positions,” he said.

With so many bears, is it time to buy stocks?

In a report last week, Bloomberg noted that investor sentiment has fallen, and this could be a positive sign for stocks.

The report noted that at the start of September, the bull-to-bear ratio in Investors Intelligence’s survey of newsletter writers fell to a four-year low of 0.9. It also noted that since 1963, the Standard & Poor's 500 Index has risen an average 11 percent in the year after newsletter writers were as pessimistic as they are now compared with an annualised return of 8.3 percent.

Bloomberg further noted that in the three previous times during the last 6 1/2 years when bearish newsletter writers surpassed bullish ones -- in April 2009, August 2010 and October 2011 -- the S&P 500 followed up with two straight quarters of gains each time, with the gains exceeding 20 percent.

An explanation for the positive potential of stocks when sentiment is weak was given by Bob Doll, chief equity strategist at Nuveen Asset Management. “The nervousness means people have stepped to the sidelines. The question is, who is left to sell? Everybody who has cash is a potential buyer.”

In other signs of bearishness among investors, the Bloomberg report noted that the “cost to hedge against stock losses is soaring, valuations are contracting, and bearishness among professional stock handicappers is rising the most in three decades”.

An earlier report by Baijnath Ramraika, CEO & CIO at Multi-Act EquiGlobe Limited, reached conclusions similar to Bloomberg's.

Analysing a market timing technique that buys and sells the S&P 500 whenever sentiment is at a bearish or bullish extreme and starting to reverse, he found that buy signals were associated with an average annualised return of 13.5 percent while sell signals produced an annualised return of 0.2 percent.

Baijnath had one important caveat though. He noted that his model was on buy signal during much of the great financial crisis. Therefore, he suggested that “it is not a tool to be used without regard to other factors”.

Fed leaves rates unchanged

The Federal Reserve left interest rates unchanged at its monetary policy meeting on Thursday.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Fed said in its statement released after the meeting.

Despite the Fed's delay in hiking rates, there was little to cheer for investors. Stocks fell, the S&P 500 edging down 0.3 percent.

Interest rates futures, though, show that traders now see a 49 percent chance of a Fed rate hike at its December meeting, down from 67 percent earlier Thursday.

Is emerging Asia facing a repeat of 1997?

The recent weakness in the markets of emerging Asian countries has led many analysts to wonder whether we are seeing a repeat of the 1997 financial crisis. Some think that things could even be worse now.

From Bloomberg:

If the 1997 Asian financial crisis was a heart attack for emerging markets, the current situation is akin to chronic cardiovascular disease, according to Macquarie analysts led by Viktor Shvets and Chetan Seth...

[T]he Macquarie analysts reckon the current situation might actually be worse...

The crux of their argument is that despite the difficulties of 1997, its effects were mitigated by rising global leverage, liquidity, and trade shortly thereafter. This time around, those factors might not be there.

However, other analysts are more sanguine.

“Things are fundamentally different now compared with 1997,” said Tomo Kinoshita, chief economist at Nomura Securities. “Authorities have introduced quite rigid prudential measures to avoid a currency crisis. The depreciation in the currency is a positive factor for the exports and general competitiveness of those Asian nations.”

“The region still has many buffers, so we are not in a repeat of the Asian crisis context,” said Anoop Singh, former director of the Asia and Pacific Department at the International Monetary Fund.

Europe and US markets shrug off plunge in Chinese stocks and possible Fed hike

Chinese stocks fell again on Tuesday, the Shanghai Composite Index plunging 3.5 percent. It had fallen 2.7 percent on Monday.

However, markets elsewhere mostly shrugged off the fall in China. In Europe, the STOXX Europe 600 rose 0.8 percent while in the US, the S&P 500 rose 1.3 percent.

Investors in the US were possibly more focused on a possible interest rate hike by the Federal Reserve on Thursday.

However, the WSJ MoneyBeat blog says that while historically, stocks tend to be volatile around increases in interest rates, equities typically do well during the tightening cycle and a year after the initial rate rise.

Citing data from BMO Capital Markets, MoneyBeat says that since 1982, there have been seven tightening cycles. In each case, the S&P 500 was higher a year after the initial rate increases. On average, the index rose 6.4 percent in the 12 months following the rate hike.

Chinese stocks plunge

Chinese stocks plunged on Monday, the Shanghai Composite Index falling 2.7 percent, the most in three weeks.

The market was down 4.7 percent at one point on Monday.

Reports over the weekend had shown that China's industrial output rose 6.1 percent in August from a year earlier while fixed asset investment excluding rural households climbed 10.9 percent in the first eight months. Both missed economists' forecasts.

US stocks were little affected by the Chinese plunge but the S&P 500 still finished down 0.4 percent on Monday.

As investors wait for Fed decision, sharp market losses may already be "baked in cake"

MarketWatch reports that US stocks rose last week, with the Standard & Poor's 500 Index gaining 2.1 percent.

“At this point, everyone is fixated on the Federal Reserve’s policy meeting, and until the meeting, volatility will remain high,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

While many investors may indeed be fixated on the Fed's monetary policy meeting, John Hussman says that in reality, "the correlation between central bank policy rates and subsequent GDP growth is next to nothing".

And for investors specifically, Hussmans says that "poor stock market returns and the likelihood of 40-55% market losses from the recent peak are already baked in the cake".

Can central banks influence inflation expectations?

If inflation expectations affect future inflation, can central banks control inflation through it?

A Bloomberg report suggests not.

A new paper, based on a survey of company managers in New Zealand, suggests central bankers may have much less control over inflation expectations than they'd like to believe, mostly because the public just isn't listening.

The "absence of even basic knowledge about the central bank of New Zealand on the part of business leaders suggests that monetary policies designed to operate through changes in the public’s expectations, as induced primarily via communications policies, are unlikely to be very successful," writes Saten Kumar, from Auckland University of Technology, and co-authors in a paper being presented Thursday at the Brookings Institution in Washington.

US stocks fall, Chinese stocks could rally temporarily

US stocks fell on Wednesday, cutting short a global rally.

The S&P 500 fell 1.4 percent, reversing early gains that had followed advances elsewhere. The Shanghai Composite Index rose 2.3 percent on Wednesday, the Nikkei 225 surged 7.7 percent, its biggest daily percentage gain since 2008, and the STOXX Europe 600 rose 1.3 percent.

The rally in Chinese stocks could last a while more though, albeit temporarily. From Bloomberg:

Tom DeMark, who predicted last month’s selloff in Chinese stocks, said the Shanghai Composite Index may rise more than 4 percent before resuming its decline.

The benchmark gauge could climb to 3,390, staging a temporary rebound similar to its rally in July, according to DeMark, founder of DeMark Analytics LLC...

“This decline that we are anticipating is something that may be drawn out,” DeMark...said on Wednesday. “We are convinced that we will see a rally” in the short term, but “we see the markets eroding again,” he said.

Markets rally with Chinese stocks

Markets rallied strongly on Tuesday, thanks to signs of stability in China.

The Shanghai Composite Index finished the day up 2.9 percent after being down 2.3 percent earlier in the session. The S&P 500 jumped 2.5 percent and the STOXX Europe 600 rose 1.2 percent.

Brent crude jumped 4 percent, copper surged the most in two years and US 10-year Treasury yields rose seven basis points to 2.19 percent.

Still, Sumanta Dey at Reuters reminds us that Chinese imports from the rest of the world fell nearly 14 percent in August compared to a year ago, the tenth straight month of falling imports -- an ominous sign for the global economy.

Do China's assets protect it from financial crisis?

Malcolm Scott at Bloomberg wrote that according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen, as of 2013, total assets in China were about 900 percent of gross domestic product, versus debt of about 220 percent.

"On that score, China's balance sheet looks a lot rosier, suggesting prospects for 'financial Armageddon' may be overblown," he wrote.

However, Scott wrote that Orlik and Chen also noted that strong assets don't mean China is immune to a crisis. "It's likely that prices are inflated, and when confidence evaporates, everything from houses to stocks and land can be hard to sell," he wrote.

Indeed, high asset values are often fuelled by credit growth and may be a reflection of the debt problem rather than a mitigating factor.

A recent paper by Oscar Jorda of the Federal Reserve Bank of San Francisco, Moritz Schularick of the University of Bonn, and Alan M. Taylor of the University of California-Davis concluded that "when credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial" and that "the damage done to the economy by the bursting of credit-boom bubbles is significant and long-lasting".

Is China's market turmoil like Japan's in the 1960s?

Bloomberg has a report that says that “China's Turmoil Could be Just a Blip”.

China’s economic slowdown and market crash often evoke comparisons with Japan’s bust in the 1990s...

Yet a more apt parallel may instead be its neighbor’s experience of the 1960s. That’s according to Paul Sheard, chief global economist at ratings company Standard & Poor’s in New York, who worked in Japan between 1976 and 2006...

Here’s what happened: The Japanese economy soared in the build-up to the 1964 Tokyo Olympics... The stock market went on a roller-coaster ride as growth boomed then slowed, and got walloped when policy makers tightened credit.

After a big sell-off in 1963, authorities intervened...

The interventions...eventually worked. Shares began to rally, and economic development continued apace...

Like Japan five decades earlier, China is still at a middling stage of economic development, meaning the economy has significant room to grow.

Still, as the article notes, there are differences.

China is facing a shrinking labor force, quite different to Japan in the 1960s. China’s economy is also more open than Japan’s was then, leaving it vulnerable to capital outflows that are now complicating its exchange-rate policy.

The demographic difference in particular will probably be critical in the longer term.

ECB revamps QE, stocks rally

While the Federal Reserve is preparing to raise interest rates, the European Central Bank looks like expanding monetary stimulus. From Bloomberg:

Mario Draghi unveiled a revamp of quantitative easing and signaled officials might expand stimulus if the rout in financial markets continues to weigh on growth and inflation.

The European Central Bank president said in Frankfurt on Thursday that the Governing Council raised the share of bonds the ECB can buy to 33 percent of each issue from 25 percent, and that policy makers are ready to make more adjustments to ensure the full implementation of the 1.1 trillion-euro ($1.2 trillion) program. A weaker global outlook prompted an across-the-board reduction of the institution’s growth and consumer-price forecasts through 2017. The euro slid to a two-week low.

The announcement initially pushed stocks up. The STOXX Europe 600 rose 2.4 percent on Thursday and the S&P 500 briefly rose more than 1 percent.

However, the latter fell back later in the day to finish up just 0.1 percent.

US 10-year Treasury yields fell two basis points to 2.16 percent while West Texas Intermediate crude rose 1.1 percent.

Markets rally but recovery may take a while

Markets finally had a good session on Wednesday.

The S&P 500 rose 1.8 percent, the STOXX Europe 600 gained 0.3 percent and the Shanghai Component Index recovered from an early 4.7 percent drop to end the session down 0.2 percent.

West Texas Intermediate crude rose 1.9 percent, the Bloomberg Dollar Spot Index rose 0.3 percent and yields on 10-year US Treasury notes rose three basis points to 2.19 percent.

A fuller recovery from the recent losses could take a while though. A Bloomberg report suggests that it could take until the end of 2015 for stocks to return to levels last seen in May.

Indeed, some analysts think that the market may not have found its bottom.

“My gut instinct is that we may not have seen the end of this,” said David Joy, chief market strategist at Ameriprise Financial Inc. “I’m not convinced the downside volatility is over.”

Markets fall but analysts remain optimistic on US stocks

August may be over but market turmoil is not.

China started the ball rolling downhill on the first day of September. The Shanghai Composite Index fell 1.2 percent on Tuesday. It was down 4.8 percent at one stage of the trading session before recovering on suspected government buying.

A report on Tuesday had shown that the official manufacturing purchasing managers’ index fell to 49.7 in August from 50 in July.

The STOXX Europe 600 Index fell 2.7 percent on Tuesday while the S&P 500 plunged 3.0 percent.

Despite the continuing declines, many analysts remain optimistic on US stocks. Among 21 brokerages tracked by Bloomberg, 17 have not changed their projections for the Standard & Poor’s 500 Index after August’s selloff, maintaining forecasts that imply a 12 percent rally by the end of the year.

After August fall, bull trend for stocks may be broken

Global stocks ended August with yet another decline on Monday.

The Shanghai Composite Index fell 0.8 percent on Monday to compete a 12.5 percent decline in August, its worst monthly fall since August 2009.

The S&P 500 also fell 0.8 percent on Monday to finish August with a 6.3 percent loss, its worst monthly loss since May 2012.

The STOXX Europe 600 Index slid 0.1 percent to extend its monthly drop to 8.5 percent, the worst in four years.

While some analysts have remained optimistic about markets despite the beating received in recent weeks, others are less so.

Mark Newton, a technical analyst and director at Greywolf Execution Partners, said that “the broader trend remains broken”.

Lindsey Group’s chief market analyst Peter Boockvar thinks that the bull market may be ending. “The ups and downs of the business cycle can’t be suspended forever by constantly manipulating interest rates,” he said.