I assume that this bit of hyperbole brought to us last Thursday (1/23/14) by CNBC’s “Fast Money” anchor, Melissa Lee, referred to the .48% drop in the Shanghai Market and the 1.51% fall in Hong Kong of that date. This bled over into Europe and subsequently into our markets. There was piling on Friday with the Dow Jones down almost 2% and the S&P and NASDAQ off over 2% each. Interestingly, on Friday the Shanghai market was up over half of one percent and nobody mentioned it.
What were the culprits?
Chinese GDP for the 4th quarter was one and the other was a 6/10ths of one percent drop in the Chinese Purchasing Manager’s Index (PMI) into a negative reading. Mind you Chinese GDP rose 7.7% (better than Chinese government forecast) and Chinese industry production rose 9.7%, but that was disappointing to some. Oh yes, GDP growth was flat vs. the previous quarter.
One article Friday stated, “While growth last year topped government targets, China’s economy is stagnating after a downward-revised 7.7% GDP in 2012 versus 9.3% in 2011.” GIVE ME A Break!!!
One last item, there were rumors circulating on a possible default that might cause a financial breakdown of China’s shadow banking system, plus derivative calls on emerging markets. I will address these in the next section.
Based on the numbers, there appears to have been no major slowing in Chinese economy. It was flat vs. the previous quarter, better than Chinese Government expectation and it was 7.7% growth….this is not a collapse or stagnation. Importantly, it has been an ongoing policy of the Chinese government to slow growth from the unsustainable, double-digit levels of a few years ago. As to the PMI number being under “50”, it is one month. It was a tiny drop that put us at that level. It really tells us nothing.
As mentioned earlier, there was a sub-plot working on the China story. This is concern over some high-yield trust bank products offered through the Commercial Industrial Bank of China, secured by the assets of a shaky Chinese coal mining company. It is speculated (mentioned several time on CNBC Thursday without corroboration) that $500 million principal outstanding of these securities could default at maturity, January 31. This is de minims versus total Chinese Trust bank industry assets of $1.67 trillion.
Again, we find The Street and investors on high alert for another “Lehman” event, the next domino to fall, precipitating a world-wide financial crisis. I am just not sure that the Chinese economy sputtering along at 7.7% (the U.S. would give anything to sputter at that level) or a trust bank certificate default would represent such catalysts. Also, when people are peering around every corner looking for the next Armageddon, it is probably no where near to close at hand.
Let me add one more twist to the tale of woe facing emerging currencies, U.S. Federal Reserve Policy. The concern is that ‘the taper’ of Quantitative Easing (or increasing the taper) will put upward pressure on U.S. rates, acting as stronger magnet for funds to exit emerging market currencies. Thus far, since the announcement and implementation of the first round of tapering, this has not been the case. Rates on the ten-year U.S. Treasury are down 16 basis points from 2.88% to 2.72%. I would venture to guess if this correction continues, more money will find its way into bonds (the old ‘safety’ trade) giving us even lower rates.
The Bottom Line
This may be the “BIG ONE”, as Fred Sanford used to say, but it is nothing to get overwrought about. It will be the normal correction we have been looking for. The media continues to do its thing. When fear bubbles up, It’s Showtime! They will do everything in their power to stoke it, keeping the maximum number of butts in the seats, glued to the tube.
What do you think?
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