Wall Street finished last week on a bad note. The Dow Jones finished down a whopping 367 points, or just over 2% in Friday’s trading session.
There was no particular economic or earnings news that appeared to spark the sell-off. It may have had something to do with the expiration of a bunch of futures and options contract. As Bloomberg reports:
‘Equities extended declines in the final minutes of trading amid the quarterly event known as quadruple witching, when futures and options contracts on indexes and individual stocks expire. More than 12 billion shares changed hands on U.S. exchanges Friday, 71 percent above the three-month average and the most since the height of the summer selloff on Aug. 24.’
Of course, the realisation that US monetary policy is tightening, after years of good times, may also have had something to do with it.
The fall in the Dow brings it to the lowest point in a couple of months and, judging from the chart below, stocks may now go on to test the lows of the August to October period.
As I wrote a few weeks ago, sharp sell-offs (like what happened in August) are often followed by a rally attempt back to the previous highs. If this fizzles out, there’s a reasonable chance that stocks will head down to test the lows.
If that were to happen, I reckon you’d see Fed officials make it quite clear that interest rates won’t rise for a long time, or that they could easily lower them again.
In short, the market owns the Fed. So while I think there’s a chance you’re going to see some more market weakness in the short term, I’m not in the camp expecting a market collapse. The Fed hasn’t lost control of things yet.
China on the other hand…
Well, it hasn’t quite lost control, but the ‘measured slowdown’ line you’re fed about China’s economy is more fragile than you think. Two news items out in the past week are cause for concern:
A comprehensive survey of companies across China’s economy reflects weaker growth than official surveys suggest. From Bloomberg:
‘China’s economic conditions deteriorated across the board in the fourth quarter, according to a private survey from a New York-based research group that contrasted with recent official indicators that signaled some stabilization in the country’s slowdown.
‘National sales revenue, volumes, output, prices, profits, hiring, borrowing, and capital expenditure were all weaker than the prior three months, according to the fourth-quarter China Beige Book, published by CBB International. The indicator is modeled on the survey compiled by the Federal Reserve on the U.S. economy, and was first published in 2012.
‘The Beige Book’s profit reading is “particularly disturbing,” with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the release. While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening.’
Given that services were meant to be the new engine of growth for the Chinese economy, this is not good news. And with commodities in a relentless bear market, that tells you that the old growth engine continues to slow too.
How is China keeping its head above water then? From Bloomberg again…
‘China’s government spending surged in November at more than double the pace of gains for revenue, a signal the government has stepped up fiscal stimulus.
‘Fiscal spending jumped 25.9 percent from a year earlier to 1.61 trillion yuan ($249 billion), while revenue rose 11.4 percent to 1.11 trillion yuan, the Ministry of Finance said in a statement on Monday. China’s government usually registers some of its biggest expenditures in the last two months of the year as provincial authorities rush to complete projects and meet spending targets.
‘Revenue growth this year has slowed mainly because of “slowing investment and industrial production, slumping general trade imports, falling producer prices, structural tax cuts and fee reductions,” the ministry said in a statement. “While fiscal revenue growth is slowing, the pace of spending has picked up rapidly. All kinds of key expenditures are well ensured.”’
In short, China is fighting its credit bust with both monetary and fiscal stimulus. The best they can do is to mute the slowdown. The size of the preceding boom tells you the bust is a momentous one. Judging from the China Beige Book report, the forces of the bust have the upper hand.
And those forces will continue buffeting the Aussie economy. Last week, the government provided an update on the budget. The projections seem to deteriorate every six months.
As reality sets is, gone are the references to a ‘budget emergency’. The view is always different from the opposition benches.
Now, the message is about structural reform. This means you’re not going to see any major changes to the next budget in May. The government will try and get a mandate for major tax reform at the next election, which means you won’t see major changes to spending programs (or the GST) until at least the May 2017 budget.
Who knows what the projected deficits will be by then?
In the meantime, you can expect to see more capital going straight into the Aussie retirement system — land. As Domain reported the weekend:
‘A knockdown in Northcote was among a collection of hot properties that ignited a bidding war.
‘With the mercury rising, four prospective buyers played their cards quickly and pushed the price $202,000 over the reserve to a sale at $1,052,000.
‘The three-bedroom house on about 375 sq m sold to a buyer planning to land bank the property.’
Which bank? The land bank. It’s safer than houses.
For The Daily Reckoning