The selling Friday started in China as fears of a slowdown in economic growth in that country intensified worries that the global economy was headed for a serious slump.
On a big picture level, the flash manufacturing purchasing managers index from Caixin/Markit economics dropped to 47.1 in August from 47.8 in July. (Anything below 50 indicates contraction.) The drop in the sector index was the fastest decline in six years and marks the lowest level since March 2009. On an industry/sector level market research Gartner reported that quarterly sales of smartphones had dropped for the first time ever.
The immediate result was a 4.3% drop in the Shanghai Composite Index. At Friday’s close of 3507.7 the index is again deep into bear market territory with a decline of 31.5% sine the June 11 high of 5121.6.
It didn’t take long for fears of slowing growth in China to ripple out across global markets in everything for oil (U.S. benchmark West Texas Intermediate fell another 2.17% at the close to $40.45 a barrel after trading a low as $39.86 a barrel in intraday trading) to technology. Apple (AAPL) let the U.S. technology sector lower with a 6.1% retreat (pushing the stock into bear market territory with a 20% decline.) The semiconductor sector fell into a bear market too. Technology momentum stocks, such a Netflix (NFLX) plunged. Shares of Netflix dropped 7.6% on Friday. Internet security high-flyer FireEye (FEYE) retreated 8.1%.
The Dow Jones Industrial Average fell into 10% correction territory from its May high. The Standard & Poor’s 500 stock index finished lower by 5.5% for the week.
That’s all history, of course—although it is very recent history. What you want to know now is where stocks go from here.
Start with a recognition that the drop of last week (and not just Friday) has done considerable damage to the structure of global stock markets. Sectors all across the U.S. market—biotech and media, as well as semiconductors–are in correction, which always raises fears that a 10% correction will turn into a 20% bear market drop. U.S. stocks have clearly broken out of the narrow 150-point trading range that has dominated the year—to the downside—and major markets are setting major lows. The NASDAQ Composite index, for example, made a six-month low. Individual U.S. stocks have fallen below support at 50-day or even 200-day moving averages and market leaders such as Apple are in bear markets. (I’d add in the huge bear market drop in Alibaba (BABA) on the New York market with shares down 42.8% from their November 10 peak and down 26.9% from the May 22 high.) Indicators such as the CBOE VIX volatility index soared last week with the VIX climbing 46% to 28.03 (a 118% gain for the week) as lots of investors and traders bought options to protect their portfolios. If nothing else that’s an indicator that traders are looking for continued high levels of volatility in the weeks ahead of the September 17 meeting of the Federal Reserve.
Add in a bear market in emerging markets that has continued to punish the usual suspects (Brazil and Malaysia) and that continues to suck in new victims. The Turkish lira, for example, finished the week at historic lows against the U.S. dollar.
Factor in what looks like a lengthy period of confusing signals about growth. It’s likely to be quarters before growth in China rebounds or at least settles down enough so that traders and investors stop worrying that this locomotive of the global economy isn’t about to suffer a train wreck. Most forecasts for the next few quarters point to China’s growth falling to 6.8% or less, significantly below the official target of 7%. There’s nothing wrong with 6.8% growth—except that once traders see the Chinese economy breach 7%, it’s going to take a few quarters of 6.8% or 6.6% growth to convince them that 6.8% isn’t a prelude to a descent to 6.4% or 6.2% or even lower. Fortunately, there’s a good chance that the next quarter or two will produce stronger growth data in the United States. Number crunchers who look study the way that later data moves preliminary reports of GDP growth up or down say there’s a reasonable chance that the 2.3% annual growth reported so far for the second quarter will get revised upward when more complete figures and a new GDP growth rate are reported on August 27. The upward revision, some economists say, could be as high as full percentage point. Investors and traders will get their first read on third quarter GDP growth On October 29. (After the Fed decides on interest rates in September, by the way.) On August 18 the Federal Reserve Bank of Atlanta released its latest forecast for third quarter GDP growth. The Atlanta Fed forecast just 1.3% growth—which certainly seems disappointing, until you realize that this forecast is up from 0.7% in the August 13 forecast. There is the possibility that the trend is running toward higher growth and that we’re looking at better than expected growth in the third quarter. Growth of better than 3% on revised numbers for the second quarter and something above 2% for the third quarter for the U.S. is going to look pretty good in a slow growth global economy and those also going to say that there’s another growth engine available besides China. Of course, we won’t actually have the data to dispel fears and back up hopes until the end of August and the end of October.
Finally, those two dates for more GDP data neatly bracket the September decision to raise interest rates of not by the Fed. It’s hard for me to see markets settling down until after that Fed decision. Until then worries about will the Fed, won’t the Fed will be, at the least, a significant amplifier for worries about global growth.
I can’t say that global markets are going lower from here with certainty. The trends—worry about growth in China and in emerging market economies, worry about a war of competitive currency devaluations, worry about U.S. economic growth, worry about a Federal Reserve interest rate move (and worry about the possibility of a lack of a Fed move)—all seem to point lower. (And I haven’t even mentioned the continued rout in commodities.) And don’t see any immediate upside trends until we get data in the fall or later on growth in the United States and China.
The prognosis, in my opinion, is continued volatility that nets out to a drift lower for global equities including the U.S. markets until the September Fed meeting.
Today’s post on my free JubakPicks.com site looks at Warren Buffett’s bid to buy Precision Castparts, a member of my JubakPicks portfolio. I ended that post with speculation on whether this deal, along with moves such as General Electric’s decision to exit its financial business and devote its energies and cash to its industrial units, marked a larger trend. The sell on Precision Castparts also has the effect of raising some cash, which is attractive as the risks in this market seem to be rising as we head into September.
On my paid site JubakAM.com today I’ve posted on China’s decision to devalue its currency. (That follows up on a weekend post looking at July’s 8.3% decline in exports and the worries that raised about China’s rate of economic growth.) Today’s post tries to sketch in some winners and losers–stronger dollar, increased competitiveness by Chinese companies thanks to a cheaper yuan, more expensive imports that will cut into the buying power of Chinese consumers. I named some individual stocks. The next bit of thinking in this direction on JubakAM.com–for tomorrow–is to look at how worries about Apple in China might be leading the tech sector lower.
Just thought I’d let you know what I’m working on at JubakAM.com–I think there’s some value to you in passing on the direction of my thinking in this market on that sight. Hope so anyway.
And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)
Everybody seems to be worried about contagion in the Greek crisis. It sometimes seems that European Central Bank president Marie Draghi is spending half his time these days explaining how the reforms initiated after the first wave of the Euro debt crisis succeeded in “ring fencing” Greece. The crisis there—even the collapse of the Greek banking system—won’t spread to Portugal, Spain or Italy or other EuroZone members, the official line goes.
But on the evidence of the last few days, it’s contagion from China’s bear markets that financial markets and investors ought to be worried about. Yesterday, for example, the stock market plunge in Shanghai and Shenzhen seemed to be creating spreading ripples in other markets and economies.
For example, after days when Hong Kong seemed surprisingly resistant to the tumble in mainland markets that had seen both Shanghai (down 32%) and Shenzhen (down 41%) fall into deep bear markets, on Tuesday the island’s Hang Seng index edged into bear territory itself falling enough to post a 20% decline from the May 26 peak. (On early Wednesday morning action, Shanghai fell another 4.2% to 3571. Analysts at Rabobank Group said they see Shanghai falling to 2500.
U.S. traded ADRs of Chinese companies, which had also resisted the early stages of the mainland decline joined in the drop on Tuesday with, for example, JD.com (JD), an ecommerce company, falling 4% after being down as much as 12% during the day. Alibaba (BABA) dropped only 0.8% but volume was twice its three-month daily average.
And there’s the effect on commodity currencies (with the Canadian and Australian dollars taking severe punishment) and on commodities themselves. Yesterday, Monday July 6, the European benchmark Brent crude fell below $60 with a 6.3% drop and with an 18% decline since May moved close to a bear market. U.S. benchmark West Texas Intermediate, which didn’t settle contracts on Friday because of the Fourth of July holiday, fell 7.7% on Monday. (Add in fears that European economies will slow cutting into demand for oil and that a deal with Iran over its nuclear program is near, which would lead to increased Iranian oil exports.)
And finally, there’s the feedback effect on China’s own domestic economy. In a poll conducted from mid-May to early July of 5,000 Chinese households with investments in the stock market only 40% still showed gains. The week before the figure had been 74%. (The speed and extent of the damage is a testament to how many new investors had been sucked into the late stages of the huge rally in mainland stocks. They put their money in just in time to get clawed by the bear. China has 90 million brokerage accounts of which 80% are retail accounts for individual investors.) The 30% and 40% losses in Shanghai and Shenzhen represent a huge hit to household incomes across China and especially for China’s middle class. That’s bad news for an economy that was already slowing.
The Chinese government’s reaction to this may be storing up more problems. Very lax standards for when a company can ask to have trading halted in its shares have led to a huge surge in trading halts. Among the ChiNext 100, 50% of stocks were halted as of the close yesterday. The other 50% fell the maximum 10% for the day. Shares of 1,300 companies are now halted for trading in Shanghai and Shenzhen, locking up about 40% of market capitalization of the exchanges. That lockup, of course, increases pressure on the stocks that are still available for trading.
I wouldn’t be surprised to see a rebound tomorrow after the recent pounding and on promises of increased liquidity from the People’s Bank and government verbiage urging support for the markets.
But I don’t think the carnage is over. The government is scheduled to report second quarter GDP on July 15. Any number less than the 7% official target for economic growth will just pour more fuel on already burning market fears. And at the moment, I just don’t see a reason for Chinese investors to buy Chinese stocks until they seem like a roaring bargain.
The Shanghai market began its extraordinary rally from near 2000 back in May 2014. In this bear the Shanghai Composite sliced through the 50-day moving average at 4544 like a hot knife through butter. The 200-day moving average at 3414 isn’t far below the Tuesday close at 3727 and aside from minor support at 3250, there’s not much support below until 2500 or 2250.
Wall Street hasn’t been impressed by Apple’s new product event today. Shares closed down $11.53 or 2.28% today. Wall Street heard pretty much what it expected to hear and sold down the shares because Apple didn’t announce any big new feature that hadn’t been priced into the recent rally in the shares.
But I heard what I wanted to hear from Apple CEO Tim Cook.
First, the new iPhones, the 5S and the 5C, will launch in China on September 20, the same day as the phone goes on sale in the United States and most European countries. (This is the first time China gets a new iPhone at the same time as the United States.) Japan’s NTT/Docomo will sell the new 5C phone as well.
Second, the new 5C, the cheaper of the two new models, will be cheap enough for China Mobile (CHL) to sell. The prices for the phone with its colorful plastic cover, better camera, and improved audio was announced today as $99 for the 16 gigabyte model and $199 for 32 gigabytes (on a two-year contract.) I think that’s cheap enough to give Apple access to the 800 million customers of China Mobile and NTT/Docomo. That access, given Apple’s slipping market share in China, is critical to Apple.
Am I totally happy with what I heard today? Read more
The week has certainly started out very well for Japan. And indeed for Asian financial markets.
First, Tokyo was announced as the site of the 2020 Olympic summer games. Shares of property developers went bonkers overnight on the news. Sumitomo Realty and Development (8830.JP), which has the biggest land bank in Tokyo with the potential for 30,000 new apartments, was up 4.7% overnight on the Tokyo market. Mitsui Fudosan (8801.JP in Tokyo) and Mitsubishi Estate (8802.JP in Tokyo and MITEY in New York), with land capacity to build 15,000 apartments, were up 6.4% and 4.7%, respectively, overnight in Tokyo.
Second, a big increase in capital spending pushed GDP growth in the June quarter up to a revised annual 3.8%. That was an increase from the first estimate of 2.6%. Of course, faster GDP growth is good news for Prime Minister Shinzo Abe’s effort to put Japan back on the path to sustainable growth, but the upward revision in capital spending is particularly significant since Japanese companies have been reluctant to increase capital spending even as consumer spending picked up. This data suggests that may have changed.
Add the news from Japan to news from China and Asian markets began the week with a big dose of optimism. Chinese exports increased by 7.2% in August from August 2012. That was above the 5.5% projection by analysts surveyed by Bloomberg. Consumer inflation rose by just 2.6%, giving the government no need to tighten.