Even if it is Monday, the market opened per usual these days – down and fighting back. The headlines blurted that China’s “weakening” economy and Ukraine’s budding civil war are the reasons for the sour mood.
· It is extremely hard to pin down the exact influence of a given event on market prices.
More often than not, the above is true. Myriad influences catalyze the market and, at any given time, one or another of those catalysts is more powerful than another. For example, today the catalysts are China and the Ukraine.
True, both create a perception of a world going wrong, and in the near term, because the market sentiment is uncertainty, the market will react negatively, meaning, those who believe the market is overvalued will sell hard and those who believe the market is bound for more glory step aside until the selling is done.
Witness the complete turnaround in the market as of this writing. How serious are the “events’ in Ukraine and a Chinese economy slowing down from three decades of overheated growth if the market can shrug off the early losses so easily? In the longer term, neither China nor Ukraine has much bearing on the ultimate reality for the market.
· Six months into China’s grand economic makeover, Beijing is playing it safe, choosing gradual progress on many fronts over game-changing, riskier reforms such as removing all controls over bank interest rates.
Actually, the “makeover” has been going on much longer than six months. In the last six months, the world has seen a more defined policy directive on where the Chinese need to go economically, politically, and socially, and active steps have been taken in those directions, and that has resulted in a clear economic slowdown, but, in the end, smart money knows the Chinese economy will land without crashing.
· Yet taken together, the incremental steps promise to reach enough critical mass to sustain reform momentum and help the world’s second-largest economy shift down fairly smoothly after decades of red-hot investment-fuelled growth.
No, China is not a long-term issue for the market and neither is Ukraine. Of course, the worst case scenario would be a problem for the world – Putin decides to roll the tanks into Ukraine, and then he decides to annex all the other former Soviet satellite countries one at a time – but how likely is that? No, Putin seems is a realist. As the former head of the KGB, he is under no illusions about how the world works. He understands that a protracted military excursion at this time would be costly to his power base because it would be costly for a country either teetering on recession or actually in recession. He watched over many a government toppling in his day, so, yes, he understands what can happen to him, and no, unless he has gone mad, he will not roll the tanks across Eastern Europe.
Fundamentally speaking, the market has a broader view of what is going on in the world. The economic picture is brightening considerably in the US and across the Atlantic.
· The ISM (Institute of Supply Management) Non-Manufacturing index for April continued to rebound. The index was reported at 55.2, which was above the consensus estimate for a reading of 54.1, and well above the March reading of 53.1. The headline index shows the services sector of the economy continued to expand for a 52nd consecutive month.
· The European Commission expects Eurozone GDP to grow 1.2% this year and 1.7% in 2015 following two consecutive years of contraction.
Despite Ukraine and China worries for now, the world is not going wrong and the market knows this. And even though the bulls are waiting to see how this uncertainty comes out, the fact remains that the money flowing is flowing into equities, not out.
A more interesting concern than either China or Ukraine is what will happen to commodities, specifically gold and oil, in a world improving economically?
We already know what is going with oil – record inventories – but what about gold? Well, referencing India, until just recently, the largest importer of gold on the planet (China is now #1), the demand for gold is dropping. Like oil, though, this does not necessarily mean a drop in price is inevitable, but it certainly does not help the price go up.
· In accordance with the latest official trade data, the gold bullion imports by the India’s Northern state of Gujarat touched lowest levels in six years during the month of April 2014, signaling a weak start for the new financial year 2015.
· The total gold imports during the month of April totaled 4.57 metric tonnes (MT). The gold imports plunged by 83.3% when compared with the total gold imports of 27.5 MT during April last year. The gold imports had declined sharply from 193 MT during FY ’13 to 92 MT in FY ’14.
Given that gold is a fear trade, a hedge when the world goes wrong, where does it go from here? And oil, with Iran and Libya coming back on line, OPEC pumping solidly, and China, yes China, slowing down, what happens to the price awash in record inventories? Something to think about, if you are an oil trader or a gold bug.
Trade in the day; invest in your life …
