The market is dropping today. One could reasonable say that profit taking is what we are seeing, but I wonder … Oh, don’t get me wrong, traders and investors are banking profit, no doubt, but methinks the news from China today that the government raised its benchmark rate 25 basis points is a catalyst for the sell-off.
You see, this move by the Chinese government surprised the market, and the stodgy old market does not like surprises. Surprises are bad for the ticker (pun intended). But wait, what if this isn’t a heartbreaker? What if, instead, this is medicine for an imbalance in the system, and it is a preventative measure to prevent a relapse?
Some analysts said the rate increase also suggested a deal was in place between China and the United States to strengthen the yuan and put an end to worries about a currency war of competitive devaluations ahead of upcoming Group of 20 meetings.
Just suppose for a moment that the two largest economies in the world are working together to create a practical solution to a potentially crippling malady – a currency/trade war. Just suppose, even for a slim moment, that the Fed is looking for a way not to have to expand its balance sheet beyond what it has done so far in these years of economic turmoil.
“It certainly leads to speculation that the U.S. and China are in some sort of a deal which will perhaps see the U.S. taking a more gradualist approach to QE (quantitative easing),” said Simon Derrick, head of forex research at Bank of New York Mellon.
Clearly, we see another advantage for the U.S. in this move, a further appreciation of the yuan. This would have a positive impact on U.S. exports, just as the weak dollar has had a positive impact on U.S. exports, but in the longer run, a stronger yuan is better than a weak dollar for the U.S. and a not-so-weak dollar is better for China.
China needs to slow its overheated economy down, or it faces runaway inflation, so higher interest rates help with this issue. Even though this move means giving up some share of the export market to the U.S., the flip side is that China has an economic interest in seeing the U.S. economic recovery gain strength, as we are one of the two largest buyers of Chinese goods. Whatever China loses now, it will regain when the U.S. economy takes off again.
So now, factor the above into the information below. One might conclude that all of these monetary machinations are not about healing a sick patient; rather, the patient is just about healed, and the caretakers want to keep it that way.
MILAN (Reuters) – The global market for luxury goods is expected to return to pre-crisis levels in 2011 on the back of a 10 percent growth this year, helped by booming Asia and Chinese tourists shopping in Europe, a report said on Monday. “Global consumption in 2011 should be significantly close to the record levels of 2007 …”
Trade in the day; invest in your life …
