The ASX opened 1% higher today following a rebound in global stocks overnight. Futures markets pointed to a 97 point gain earlier this morning. In the wake of the recent rout, investors will welcome a positive end to the week.
Looking around the globe, the last 24 hours was encouraging for most major markets.
US stock markets all finished higher, up over 2% each. The S&P500 closed on 1,987 points, or 2.43% for the day. Meanwhile, the Dow Jones rose 2.27% to 16,654 points.
This positivity mirrored rebounds in Europe and China too.
The FTSEuroFirst, an index of leading European companies, finished 3.6% higher. Meanwhile, markets across Germany, France and Britain all rose by over 3%.
In China, the Shanghai Composite Index closed 5.3% higher yesterday. The Shenzhen Stock Exchange was also up, rising by 5.9%.
We should see this trend extend to Aussie markets today too.
US economic data to bolster ASX
Driving the surge on US markets was the release of better-than-expected GDP growth. Last month, GDP figures came in at an announced 2.3%. That was revised up to a much higher 3.7% yesterday. What’s more, falling unemployment claims from last week provided another boost to markets.
The encouraging GDP data comes at an interesting time, ahead of the highly anticipated US interest rate decision next month. For much of this year, markets expected the Federal Reserve to lift rates in September. But the conversation has now changed completely. It looks as if the Fed will hold off on raising rates. Why?
Well, it’s largely down to the troubling news coming out of China.
The likelihood of a rate rise fell sharply on the back of the yuan’s recent devaluation. A week later, the rout engulfing Chinese markets cast a cloud over the world economy. And it only added pressure on the Fed to hold rates steady.
That’s why this 3.7% GDP figure is so timely. Once more, its cast further doubt over the Fed’s upcoming decision. Why?
Because a growing economy is what the Fed was pining for. It was looking for any kind of evidence which supported a lift in interest rates. It just needed strong economic data to back that up. It’s now got its opportunity.
But it won’t take.
As I’ve argued before, the Fed will overlook any opportunity to raise rates. That’s because it was never its intention to lift rates in September. It can’t tighten credit when the rest of the world is going in the opposite direction. That’s especially true now that China has joined the currency devaluation game.
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Are Chinese markets a worry for the global economy?
Not every analyst is convinced about the effects Chinese stocks have on global markets. Some, like LPL Financial, think the links are questionable at best. They argue markets are wising up to the idea that China’s issues have weak links to the global economy. And they question whether investors are right to panic in the context of this divide.
LPL goes one step further. It suggests Chinese stocks have no real connection to the Chinese economy either.
It’s true that Chinese markets have little, if any, exposure to global stocks. But we can’t separate its markets from global ones as easily.
Markets are, by their very nature, irrational. They’re motivated by fear more than any kind of logic. That’s particularly true when you have as many inexperienced investors as China does.
Chinese markets went into panic mode because people got concerned. They worry the economy is slowing so fast that they’ll lose all their wealth tied up in stocks.
The bad news for them is that stocks need a major correction.
The ‘great rise’ may need a ‘great fall’ to give Chinese markets some degree of normality again. After all, Chinese stocks are overvalued, as evidenced by high P/E ratios. And we know that companies haven’t grown to support this massive rise in P/E ratios. Stocks may need to fall back to 2012 levels, before Chinese markets exploded.
This all comes back to psychology as much as anything. Both domestic, and international, investors fear the Chinese economy is slowing. And there’s enough data supporting this belief too. Manufacturing is down, trade is down, and overall growth is slowing.
As long as that sentiment remains, global stocks can’t escape the hit they’ll take in the long-term.
But, in between major corrections, there’ll be days like today. Days where investors catch a break, and regain some of their losses. Yet the broader market trends aren’t positive. If the global economy continues to falter, led by China’s sluggishness, stocks will only trend down. And no positive US data will change that either.
Contributor, The Daily Reckoning
PS: Unfortunately, Chinese investors aren’t alone in fearing a bigger market crash. Aussie investors are asking themselves what does the future hold for the ASX. Whether you’re a glass half full person or not, the signs aren’t good. The Daily Reckoning’s Vern Gowdie believes the ASX is heading for a catastrophic crash.
Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s ranked as one of the Australia’s Top 50 financial planners. Vern says the ASX could lose as much as 90% of its $1.8 trillion market cap. That’s why he’s written ‘Five Fatal Stocks You Must Sell Now’.
In this free report, Vern wants to help you avoid the coming wealth destruction. He’ll show you which five blue chip Aussie companies could destroy your wealth. It’ll surprise you to learn which companies made his blacklist. He’s also identified one major commodity stock that could catch you off-guard. To find out how to download the report, click here.