Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

If China Sneezes, Wall Street Will Catch A Cold

Stock-Markets / Articles Feb 01, 2010 - 05:34 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleJon D. Markman writes: Investors who needed proof of China's increased importance in the post-financial-crisis world only have to look at the nervousness of recent weeks to get a glimpse of the future.

When U.S. stocks fell sharply late Friday, they capped off a harrowing 10-day span that has seen the broad U.S. market benchmarks drop by nearly 7%. Emerging markets are down 9%. Not surprisingly, investor fear has sent volatility rocketing 40% - the largest two-week increase since the global financial crisis went nuclear back in October 2008.

Complicating matters was the continued strengthening of the U.S. dollar - something we've been discussing and warning about for a few weeks. With fear on the rise among global investors, many are abandoning risky positions in emerging-market stocks and bonds and moving cash into the safety of U.S. Treasuries. This bolsters the dollar, which was up 4% in two weeks. That exerts a lot of pressure on commodities. Crude oil fell more than 7% during the week. Gold is down 5%.

The corporate bond market - which has been red hot lately, helping to underpin stock-market gains - continued to advance, but slipped relative to ultra-safe government debt. Tim Backshall of Credit Derivatives Research wrote in a note to clients that both high-yield and investment-grade credits have been making the longest and most consistent run of lower lows versus ultra-safe U.S. Treasuries since February 2008.

While government debt has the edge for the moment, the long-term corporate-credit bull market remains intact, according to WJB Capital Group Inc. strategist Brian Reynolds. He sees the credit bears making a run at credit-derivative products that insure against bond defaults, which are a cheap way to try to manipulate the market.

Indeed, the cost to protect against default at banks like JPMorgan Chase & Co. (NYSE: JPM) and Goldman Sachs Group Inc. (NYSE: GS), not to mention Greece, jumped noticeably last week. But the damage has been limited as bears have failed to get traction against the instruments that they used to catalyze the 2008 credit crisis.

This lays the groundwork for a powerful snapback rally for stocks.

The China Surprise

Investors have faced a litany of worries lately. The combination of new unforeseen and uncomfortable variables has shocked people out of complacency. And that's why last week's reaction was so dramatic.

Many of the assumptions that have underpinned the steady low-volatility rally out of the March 2009 low have been shaken. Assumptions like steady-and-solid growth from China. Assumptions that Wall Street's return to big profits wouldn't be interfered with. Assumptions that politicians are loath to do anything that would upset markets after the big scare back in September 2008, when the U.S. House of Representatives rejected U.S. President George W. Bush's financial bailout package.

There were amplified concerns over credit tightening in China as policymakers there continue to fight runaway loan growth, a frothy real estate market, and emerging inflationary pressures. The iShares FTSE/Xinhua China 25 Index Exchange Traded Fund (NYSE: FXI) has fallen under its 10-month average, which is the lower boundary of a bull cycle. Closing beneath that support is at minimum a yellow flag for the rally in emerging markets stocks.
A second monthly close under that level would seal the deal. It's serious stuff.

How could that happen when the Chinese government just reported fourth-quarter gross-domestic-product (GDP) growth of 10.7%? That sounds awesome at first until you consider that the bureaucrats running the show over there are targeting growth of 8%. This "overheating" is resulting in inflation: Consumer price inflation jumped 1.9% year-over-year in December from 0.6% in November and is expected to rise to 3% as soon as February.

Inflation is terrible news for China and has historically been a source of social unrest. Food prices are a much more significant portion of the average Chinese family budget than they are for households in the West, so the fact that vegetable prices rose 16% between November and December is cause for great concern.

As a result, analysts at Capital Economics believe the first official interest rate hike out of China could come as soon as early March - which just so happens to coincide with the ending of the U.S. Federal Reserve's direct-bond purchase program.

Since China is the lender of last resort in the world - as the Bank of China has purchased hundreds of billions of dollars worth of corporate and government debt in Europe and the United States at distressed prices - rate hikes by that country's central bank may actually mean more than most Western observers have been thinking. They carry a lot of weight.

It's possible that when optimists decided not to worry about the U.S. Federal Reserve raising rates this year, they were focusing on the wrong central bank. The bottom line: It seems the world markets last week decided to price in interest rate hikes as a matter of grave importance, and are relegating European Central Bank (ECB) decisions to second-tier status, and perhaps the same for the Federal Reserve. If this is true, it's a shocker - and a harbinger of a new era.

The Week in Review

Monday: Existing home sales dropped more than expected in December, at an annual rate of 5.45 million units. Compare this to the 5.9 million-consensus estimate and November's 6.5 million result. The expiration of the now-extended first-time homebuyer tax credit was blamed for the slide.

Tuesday: The latest Case-Shiller home price data indicates that the home price recovery has stalled. The index dropped 0.2% for November following a 0.1% drop in October. Separately, consumer confidence for January increased more than expected, as people slowly get more optimistic about the job market.

Wednesday: A busy news day in which Apple unveiled a new tablet computer, Congress grilled U.S. Treasury Secretary Timothy Geithner and his predecessor, former Treasury Secretary Henry M. "Hank" Paulson Jr. about the American International Group Inc. (NYSE: AIG) bailout, details of U.S. President Barack Obama's first State of the Union address leaked and the Federal Reserve announced it would leave interest rates unchanged. New home sales for December came in under expectations thanks to the previously mentioned expiration of those first-time homebuyer tax credits.

Thursday: Economic data came in lighter than expected, as durable goods orders for December rose just 0.3%, a far cry from the 2% jump expected. Meanwhile, initial jobless claims for the week of January 23 fell by 8,000 from the prior week to 470,000, but that again was higher than the 450,000 analysts expected. Continuing claims were also a bit higher than expected, at 4.6 million.

Friday: A batch of solid economic news. GDP expanded by a better-than-expected 5.7% in the fourth quarter. The Chicago Business Barometer increased more than expected, rising to 61.5 vs. the 57 consensus estimate thanks to a flood of new orders to manufacturers in the Midwest region. Any reading over 50 indicates expansion.

The week ahead

Monday: The ISM Manufacturing Index will provide insight into how manufacturers fared in January. Hopes are high following last week's Chicago Business Barometer results. Exxon Mobil Corp. (NYSE: XOM) reports fourth-quarter 2009 earnings.

Tuesday: Motor vehicle sales for January will be reported and will provide a look at consumer spending following the holiday season. The Dow Chemical (NYSE: DOW), United Parcel Service Inc. (NYSE: UPS), and Kraft Foods Inc. (NYSE: KFT) report fourth-quarter results.

Wednesday: The ISM Non-Manufacturing Index will report on the health of the services sector. Cisco Systems Inc. (Nasdaq: CSCO) reports fourth-quarter results.

Thursday: Chain store sales for January, initial weekly jobless claims, and new factory orders are on the schedule for today.

Friday: The big January employment situation report will provide an update on the unemployment rate and the change in payrolls. Analysts expect no change in payrolls and a slight increase in the unemployment rate.


Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules