Friday, November 12, 2010

Chinese Markets with Worst Day in Over a Year as Bernanke's "Success" in Herding Risk Capital Overseas & Into Commodities Bears Fruit

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Preface: Take all the data below with many tablets of salt.  China would have us believe they have engineered double digit GDP growth with 3%ish inflation for years.  Somehow it's neighbor to the south, India, currently has 9%ish growth but 8%ish inflation, but China is a mystical land called Goldilocks.  Let's be clear, if their growth is anywhere near 10%, then their inflation is also 8-10%. [Sep 13, 2010: BW - What's China's Real Inflation Rate?  (What's China's Real Anything?)]

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More signs of 'success' by the Bernanke plan, as risk assets flood overseas.  Even official Chinese government inflation is picking up, causing consternation of an imminent rate hike - this would be the 2nd in less than a month (if it happens this weekend).  Shanghai dropped 5.2% overnight, for the worst session since August 2009.   The Chinese index has had an interesting year - it was a huge under performer almost the entire year, and then in September while the rest of the globe shot up on "QE2!" celebration, it continued to look lost in space.  After a holiday in early October, speculators came back engaged and the Chinese market has turned vertical for a period of 4 weeks.

The chart below has a 1 day delay, but Shanghai closed at 2985 (vs 3148 close), breaking back below its 20 day moving average but only putting the index at end of October levels.



However, the commodity complex is very much dependent on the Chinese miracle, so it will be interesting to see how these 'stuffs' (which aside from oil finally showed signs of rolling over the past 2-3 sessions) act today.

Weekly performance in commodities - click to enlarge



If every human and algo was not in the same trade, this would be a relative over reaction but the problem with markets today is massive correlations cause huge dislocations - and eventually nasty reversals.  But until the music stops, the speculators are content to dance in blissful glee.  Let us also watch the small cap Chinese stock complex in the US as that is where the rampant speculation has centered the past 4-5 weeks.

Via Bloomberg:

  • China’s stocks tumbled the most since August 2009, as investors speculated policy makers may raise interest rates for the second time in two months as early as today to curb inflation.
  • Consumer prices rose at the fastest pace in two years.   “We know there’ll be more tightening given how inflation has accelerated and home prices haven’t come down,” said Mark Tan, who helps oversee $12 billion at UOB Asset Management Ltd. “The sudden talk that there may be an interest-rate hike as early as the end of today really spooked the markets.”
  • The Shanghai Composite Index dropped 162.31, or 5.2%, to 2,985.44 at the close, the most since Aug. 31, 2009. 
  • The Shanghai Composite dropped 4.6% this week, halting a six-week rally.
  • Consumer prices jumped 4.4% in October, the fastest pace in two years, and more than the 4% median forecast. September prices rose 3.6%. The government’s full-year inflation target is 3%.
  • The People’s Bank of China on Nov. 10 ordered an increase in bank reserve requirements by 50 basis points from Nov. 16, the first nationwide boost since May. 
  • “There’s talk of an interest-rate hike over the weekend,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “It’s quite possible given how inflation has accelerated.”
  • The central bank raised rates last month for the first time since 2007 as part of an exit from crisis policies that included scrapping in June the yuan’s peg to the dollar.
  • Copper tumbled from a record in London and dropped by the daily limit in Shanghai, as some investors deemed the rally excessive on speculation tighter monetary policy would curb demand for industrial metals. Other base metals also slumped.
  • “There are concerns that China may have to do a series of rate increases to stem inflation,” saidLim Chang Gue, who helps oversee $29 billion as a fund manager at Samsung Asset Management in Seoul. “That’s affecting sentiment broadly today given that China has been one of the biggest drivers for growth.”
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