Strong gains in China lead bullish sentiment in global bourses
The Shanghai Composite rallied in trading on Thursday 27 August, surging 156.4 points, and then gained another 4.9% on Friday to close the week at 3232.35. Following several days of sharp losses, investors in China were finally relieved as the bourses recovered some of their losses from the week. It was all smiles across the trading floor in China as a week that began with ‘Black Monday’ has slowly turned the corner.
The Chinese authorities are intent on rooting out the elements allowing for market weakness, such as rogue brokerages and banks. The government holds these financial institutions responsible for the massive capital flight that has left the country since the stock market rout. Malpractice allegations have been levelled against five of the country’s largest brokers, but an as yet undisclosed number of underground banks have also been implicated in the probe.
Chinese national pride at stake
China is attempting to inject confidence into its floundering stock markets, ahead of the WW2 celebratory parade taking place in September. Tweets by traders alluded to China’s Shanghai Composite index being 40% below the June high, but 40% higher than it was a year ago. The measures adopted by China have been wide-ranging, from a 2% devaluation of the CNY, to a 50-basis-point rate cut to the main interest rate, massive purchases of shares on the markets, investigations into rogue financial institutions and more.
In an effort to prevent the yuan from going into freefall following a week of massive sell-offs, the People’s Bank of China and the authorities drove down the country’s foreign exchange reserves – selling dollars, pounds and euros to keep the yuan stable. Calls for a purification of the stock market have been made and the authorities have been cracking down on banks that allow traders to transfer over $50,000 per annum out of the country. But investors are not convinced that the Chinese government can effect positive change given the fundamental weakness in the economy.
How are global markets reacting to the turnaround?
European markets had a mixed reaction to efforts by China to find a tincture to the stock market woes. Black Monday hit European bourses hard, but Tuesday provided relief in the form of a strong rally. By Wednesday, market uncertainty returned and European bourses ended in the red, losing as much as 2% and eliminating gains from the previous day. Britain’s FTSE 100 index ended the day on Wednesday 1.3% lower losing some £30 billion, while the DAX 30 and the CAC 40 each lost 1%.
The biggest gains were recorded on Wall Street – the largest rally in four years. This spurred other Asian markets to rally, notably Hong Kong, Japan and South Korea. Of course, sentiments from a Fed spokesman largely dispelled the possibility of an imminent rate hike. This positive news caused a strong rally across the board in Asian markets with the following gains being recorded:
- The S&P 500 soared as much as 4%
- The S&P/ASX 200 ended at 5,238.70 (+1.2%)
- The Kospi closed at 1908.0 (+0.7%)
- The Hang Seng Index closed at 21,838.54 (+3.6%)
- The Nikkei 225 closed at 18,574.44 (+1.1%)
Traders see structural weakness in China
Markets were largely undaunted by China’s decision to slash the main interest rate by 50 basis points. Analysts, investors and traders are more concerned that the problems in China are deeper and that a Chinese economic slowdown is unfolding. Since China is the world’s second-largest economy, weak Chinese demand has sent commodities prices plunging, impacting heavily on emerging market economies and their currencies.
That China has switched from a manufacturing-focused economy to a consumer-centric economy is also telling on the numbers. Manufacturing data in China has plunged to a six-year low and the 7% GDP rate would be the slowest in a quarter of a century – if it is even being forecast correctly which many analysts seriously doubt. However, it should be noted that a Fed rate hike before the end of 2015 remains a strong possibility and global markets will not like that a whole lot.
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