Dog days leave stocks in the kennel

7 min read

Question One: What is higher, the value of stocks “wiped off” by the sharp correction which is taking place in global equity markets or the aggregate IQ points which have been switched off by panicking investors?

No need to answer that one but still worth a thought.

I prefer to avoid the term “rout” when it comes to sharp sell-offs because there is no equivalent for equally headless buying of stocks – have you ever heard a TV pundit tell you how many hundreds of billions are added to the value of an index when blind buying is the order of the day? – although even I must concede that what we saw on Wall Street on Friday and now in Shanghai today certainly deserves the sobriquet.

Losses of 3.13% on the Dow, of 3.19% on the S&P and of 3.53% on the Nasdaq looked pretty darned bloody going into the weekend but they fade into insignificance when placed opposite the losses of nearly 9% by which the two key Chinese indices had traded down at the day’s lows.

Then, not unlike last week, they started to recover sharply, which again looked suspiciously like central government intervention. At the time of writing, there is no sense in trying to forecast where the market will close and how much sellers, especially leveraged forced sellers, will be out of pocket for having cut their positions.

If Beijing can succeed in scaring people into hanging on rather than selling, then it will be the first government to have done so. It announced this morning that it will not only intervene itself through the good offices of the PBoC but that it will also permit the state pension fund to extend equity holdings to up to 30% of total assets which is thought to potentially add up to US$500bn in investment capacity to the Chinese stock markets. There is also talk of the Required Reserve Ratio being lowered again in order to inject further liquidity into the economy.

Disconnect

Not only in China but around the globe there is a serious disconnect developing between markets and underlying economies and all this is taking place in the doggiest of dog-days of August when there is little serious institutional capital available to stem the tide.

On Thursday, I got a note from a reader which asked “Soooooo, your (sic) saying, China is cheap now, buy it? :-)” to which I replied “Am saying China trades to rules I don’t know”.

At one point today, the Shanghai Composite had fallen into negative territory, year-to-date and I must confess that at that level it did look tempting. It must have been some more intervention which pushed it back out of the red and into the green zone which I suppose is where the powers that be will have wanted it although there is no saying that the swarm of sellers can’t and won’t eventually get the better of the authorities. I recall Japan trying the same ruse 20 years or so ago with the loudly trumpeted, centrally staged equity buying programmes and look where that got them.

The big theme, however, is whether the Fed can tighten in light of the fears of a slowing global economy and whether the US has enough underlying strength to withstand a normalisation of the interest rate structure.

The argument, finally, is no longer about the effect of the first or even the second tightening but of where the Fed might want to end a tightening cycle and what might await the economy if, as and when it gets there. Euro/dollar looks to be indicating that the expectations of an early tightening move – “hike” is slang, much beloved of non-native English speaking analysts and economists which is as unbecoming of serious debate as is referring to a sell-off as a “puke” – might find itself pushed onto the back-burner.

Trading this morning in the high US$1.14s; it is at its best level since at least February. In early trading in Asia, it got to US$1.1499 so cracking US$1.1500 can only really be a matter of time and I wouldn’t be at all surprised to see it happen today.

While in the process of breaking notable levels, oil is still sliding with WTI cutting through US$40.00 pbb like a hot knife through soft butter. Again at the time of writing, it was pressing hard against the US$39.00 level.

Much has been made of the recovery of gold which is supposed to be the safe haven but looking at it priced in euros, it seems to be going nowhere in a hurry. I times of hyped panic, it is easy to forget that the dollar in which commodities are priced is also a moving target. On the same note, of course, oil priced in euros has collapsed by even more than it has in dollars.

Though not a great fan of Japan’s Prime Minister Shinzo Abe and his many blunt and broken arrows, I do have to agree with him when he requests tolerance of the BoJ which is missing its inflation targets. How could it not, given the influence which hydro-carbon prices have on Japan’s inflation seeing as that it has to import every single drop of oil consumed in the country. The disinflationary effect of oil is clearly out of its hands.

Overall, there are too many moving parts and markets are, across most asset classes, unhinged. Yet, we are in August. There will be plenty of cash sitting on the side-lines when the high and mighty of the investment industry return over the next couple of weeks from their beach-houses on the Cote d’Azur and in the Hamptons. I would be cautious of getting too short of markets at these levels. In fact, it might be time to start scaling into our markets again, albeit cautiously but best leave China to the Chinese.

Anthony Peters