After Wall Street’s strong Friday and week, everyone’s attention is now on whether the US markets can make it back into the black for the first time this year.
They only need five days or so of solid trading for the Dow to be back in the black: the Standard & Poor’s 500 needs another 5.3% to go: but seeing it rose 4.3% last week (as did the Dow, with Nasdaq up 4.9%), all things are possible.
But confident US and other investors should look at what is happening in China and start wondering: is that market’s current implosion a catch up to the rest of the world, or the sign that the only buoyant economy in the world is having problems.
In other words, China’s economy may be growing fast, independent of the US (‘de-coupled’, but has the Chinese stockmarket ‘re-coupled’ with the rest of the world?).
Australian, US and European investors have been so focused on finding the sunny uplands past the current crunch time in their markets, that they have ignored the biggest stockmarket collapse for years.
Remember how the world trembled when China fell 8.5% in a day at the end of February 2007? Well it plunged 14% last week without a quiver.
China’s Shanghai Composite Index slid 4% Friday to close at 3,094.668, a 12-month low, as investors continued to worry about the tightening monetary policy of the government and its impact on earnings.
A major stock in the indexes, huge oil group, PetroChina lost 5% to Rmb16.02, below its float price last November of Rmb16.70. Remember how the price then soared and for a time was the biggest stock in the world by market cap?
The Shanghai Composite Index has dropped 49% from a peak of 6,124 reached on October 16 last year. The falls in Australia, the US and Europe from their peaks are nowhere near a half of that figure.
Shanghai’s market is one of the two in China and the CSI 300 Index, which measures the 300 leading Yuan-priced A class shares traded on the two markets, dropped a very sharp 14% last week, the most since the index’s start in 2005.
It’s why Asia fell on Friday and was easier for most of the week in contrast to the rebounds seen in Europe and the US
The MSCI Asia Pacific Index lost 0.2% on Friday but was little changed last week, in contrast to the three-week, 10% advance in the month before.
The index began rallying from a two-month low on March 17 as the US Federal Reserve backed the bailout of Bear Stearns and again cut interest rates to shore up confidence in the financial system.
Tokyo’s Nikkei rose 0.6% on Friday The Nikkei added 1.2% last week for a fifth week of gains. Most other Asian benchmarks dropped, with Australia’s ASX 200 Index down 1.6% on Friday, which wiped out the week’s gains. South Korean stocks edged up 0.2%, Taiwan slipped 0.2% and Singapore stocks were off 0.3%.
A big driver in Australia on Friday was Brambles which suffered a record fall on news it may lose a contract with Wal Mart, the big US retailer. The fall was partly reversed after the company said its talks with Wal Mart on pallet management arrangements had no impact on sales.
Our market should be up around 80 points today, or 1.3% if the futures market close on Saturday morning is any guide.
US investors however, were too focused on their own market and attempts to push the recovery further, in the face of worsening economic conditions to notice the moves in China.
US shares had a very good week, the best since February for the Standard & Poor’s 500 Index, after a number of companies did better that forecast (could analysts have set forecasts too low?).
The huge 228 point rise for the Dow all but reversed the 256 point slump the previous Friday on the back of those poor figures from General Electric.
All three major indexes ended the week up more than 4%, with the Dow posting its best week since February.
The Dow and the S&P 500 each ended the week up 4.3%, while the Nasdaq ended 4.9% higher.
The S & P has risen 9.2% from the 19-month low on March 10, but it’s still down 5.3% so far in 2008.
European stocks rose the most in two weeks reacting to good news from the US and better news from a couple of leading continental majors such as the big fertiliser group, Yara International, which reported record results (as our Incitec Pivot will soon), and giant UK retailer Tesco.
The Dow Jones Stoxx 600 Index added 2.4% on Friday to take its weekly gain to 3.2%. National indexes advanced in all 17 western European markets that were open. London’s FTSE 100 added 1.3%, France’s CAC 40 2.1% and Germany’s DAX 2.4%.
The AMP’s Chief strategist, Dr Shane Oliver says:
While it’s been very shaky the rally in shares from the lows in mid-March still seems to be continuing and its worth noting that share market trading volumes have remained low on days when shares fall and high on days when shares rise suggesting that selling pressure is continuing to fade. Its also a positive sign to see global banks/investment banks managing to rally despite more asset write downs and capital raisings. We see shares rallying further into May.
But its still too early to say that the bear market is over and the next three to six months are likely to remain rough.
While the worst of the credit crunch may be over, credit markets are still a long way from behaving normally, the economic outlook is still deteriorating both globally and in Australia and considerable profit downgrades lie ahead. This all means that a fall back to new lows in shares at some point over the next three to six months is a high risk.
• Looking beyond the current turmoil though, by year end shares are likely to be back on to a sustainable rising trend supported by very attractive valuations, a very stimulatory global monetary backdrop, the prospect of interest rate cuts in Australia through 2009 and expectations for stronger global growth
