Everything That Comes Down Must Go Up?

Turning the old adage on its head, equities indices across the globe are pulsing with new life and – dare we say? – optimism. Was the deep correctional dive and equally steep return of stocks really necessary?

In hindsight it’s easy enough to answer a confident yes, although when everyone was losing money it didn’t seem so funny at the time. A couple of things have changed. One is somewhat important, the second is crucially important.

First, let’s talk about China. China’s Shanghai indices – especially the composite we follow regularly – should have reached a technical bottom now. That is most likely what is accounting for the support level we are seeing developing around the 3,000 mark. Technicals follow fundamentals and those technical assessments had pretty clear news to follow, then gained a life of their own as bulls stepped back into the Asia games.

The People’s Bank of China cut interest rates and it has also, provocatively, cut the Reserve Requirement Ratio. Both moves stimulated buying in Shanghai. (The buying spilled over into Hong Kong and Tokyo.) Since the government in China functions as all things to all people, it is easy to comprehend the sense of relief in investors who now know the government is backing the equities markets it also created. (Some coincidence, eh?)

But… Big Daddy can’t solve every problem, every time. We look for Shanghai’s sails to be trimmed again next week, then for it to stabilize and then dip in late September and early October. We don’t believe that the fundamentals in the broad Chinese economy are all that solid and we believe that, as manipulated as it is, the equities markets there are reflecting a substantial portion of the truth about the total output of the giant nation.

Part two: the United States injected a huge dose of optimism into the trading game today. William Dudley’s comments yesterday helped soothe troubled minds. The president of the New York Fed basically nixed the idea of a rate hike in September and possibly October. That leaves December.

Even more importantly, U.S. durable goods were up again in July and the growth of the U.S. for Q2 was revised upward to 3.7%.

Those factors are important because while markets were going ape earlier this week, it was China – the tail – wagging the U.S. – the dog. Even if we accept China’s generally sketchy economic data, the U.S. is still twice as large as the second largest economy. The EU, when considered in aggregate, is yet again larger than the economy of the U.S.

Put simply, China, no matter how drastic its volatility has been, should not be rocking the boat as much as it did.

The U.S. dollar has been reflective of the strengthening of the U.S economy, moving up so other markets were affected.

Gold’s small decline today is attributable entirely to the dollar’s strength, regular trading giving the yellow precious metal only a slight boost.

Oil was invulnerable to dollar strength, prices snapping back forcefully from 6-1/2 year lows. At 3:30 in New York, West Texas Intermediate is up more than 10%, an astounding figure.

A number of factors were at work. Stockpile draw-downs were in play. There was a major disruption in a pipeline in Nigeria, squelching 180,000 barrels per day for the short term. (The pipeline break was so large and impactful that Shell declared a force majeure on its Bonny Light crude coming out of Africa.)

We should be keeping an eye on European economic indicators now. If the U.S. (with Canada and Mexico) is crucial to the continued advancement of the world’s markets, Europe is practically as important.

If we see the whole trans-North Atlantic economic complex to boom, a bigger and longer expansion could be in store regardless of what happens in Asia.

Wishing you as always, good trading,