Wednesday, August 11, 2010

S&P Futures Sink on China Slowdown...Unlike a Week and a Half Ago

A lot of irony this morning.  If you recall a week and a half ago I was very cautious going into the Chinese PMI report... it came in weak.  Instead of making markets fall, they rallied.  Why?  The explanation was the weaker Chinese economic figures meant the the government could cut back on measures they had imposed to slow down the economy.  A "Goldilocks" (not too fast, not too slow) economy would emerge, from central command in Beijing and all the world would be a blessed place. So "bad news = good news".

Now, not 10 days later, we have more news of slowdown in China and instead of the same reaction we had that Monday morning where everything was rainbows and butterflies, the markets are selling off sharply.  Should there be any difference in reaction a week and a half later?  Not really.  Either you are cheering for a Chinese slowdown because it means the natural ebb and flow is slowing down a hyper economy, fed with its own brand of steroids from early 2009 - or you are fearing it, because China has been the lynchpin of worldwide growth the past 18 months.  Instead, we have had both reactions... but that makes sense, because we live in a bipolar market with no memory from day to day.

I mentioned late last week in my 'useless prediction of the week' that I expected the market (at the time trading around S&P 1120) to react in a disappointing fashion to the lack of follow through by the Fed with the full QE and fill a gap below S&P 1107.  Instead the selloff happened (a) within an hour in some sort of delayed reaction to the poor employment data and (b) in the hours BEFORE the meeting yesterday.  Hence that selling in the morning took out much of the fluff in the market, as it was widely acknowledged that full QE2 would not happen this meeting, which had been theorized the week before.  So instead we rallied on the news rather than selling on it.

Whatever the case I was looking for a 'gap fill' at S&P 1106.44.  Friday we came within 0.5 of a S&P point of that level but bounced as "buy the dip, because bad economic news = more free money from the Fed" thinking came to the rescue.  So to come full circle, we are reacting to bad Chinese news that we should have reacted negatively to a week and a half ago, but since at that time bad news = good news but today instead bad news = bad news, it looks like we are going to drop down to fill that gap this morning.

And if you can follow that logic, more power to you.

(we will open clearly below the 200 day simple moving average this morning, the 200 day exponential is still down at S&P 1096)

Meanwhile as equity investors drink (Fed provided) Kool Aid, the bond guys continue to send warning shots - the 10 year is now down from 4% (in April) to under 2.8%!  Shades of mid 2007 when giddy equity investors had not a worry in the world as they sent the S&P 500 to all time highs in October of that year... while they whistled past the graveyard.  I have a feeling we're going to be looking back at this chart in Q1 2011 and talking about similar whistling.

  • July growth in factory output slowed for a fifth month to 13.4 percent over a year earlier, its lowest level this year. Retail sales and investment in factories and other fixed assets also slowed.  A statistics bureau spokesman said the declines in economic indicators for July were "not big" and could be positive for official efforts to improve China's economic efficiency. He gave no sign the government plans to change policy.
  • "The fall in economic indexes is mainly a result of the government's active macro-controls," said the spokesman, Sheng Laiyun, at a news conference. "Appropriate declines in economic growth are helpful to prevent overheating, and also are good for accelerating economic structural changes."
  • Demand for steel, cement and other building materials has faded as Beijing winds down its 4 trillion yuan ($586 billion) stimulus, which pumped money into the economy through higher spending on building public works.  An array of other indicators from manufacturing orders to auto sales also show growth steadily declining.  July housing prices held steady from June levels in a sign the government's lending curbs were working. But that easing has come at the cost of a slump in sales and construction.

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