August 17, 2015
Weekly Market Outlook
By Keith Schneider
After a very shaky start to the week as markets reacted to the devaluation of the Chinese currency, US equity markets regained its footing and closed higher by the week’s end. It is unclear that radical measures by the Chinese government to spur the economy will be enough and just how much more are they willing to do.
Noteworthy is that US bond yields are falling and Utility stocks rising, but not high yield debt which is sometimes a good leading indicator of stock prices. The big question remains, with China under intense pressure across the board and the dollar already strong, will Yellen be able raise rates without crippling our exports and turn a modest recovery into a recession? Furthermore, the Fed has other conflicting pressures because with rates at effectively zero it has little room to maneuver in the event of another financial crises.
The current state of the equity markets is confusing at best. On one hand, US equity prices long term bull seems mostly intact with the exception of big cap stocks that populate the Dow industrials. They are most exposed to global trade and currency wars. The Dow entered into a death cross this week. On the other hand, the tech laden NASDQ 100 bullish phase is firmly intact.
China, a key driver of global growth has hit a brick wall. The individual bricks in the wall add up to a trifecta of bad news. The key ingredients include bubbles in its stock market, its real estate markets, and record debt levels. You can add to the list other items like shoddy infrastrure that caused a chemical explosion this week killing or injuring hundreds of people. Other items like blatant fraudulent accounting by even their largest publicly traded companies also make the list. For instance, a solar company (now delisted) controlled by Le Hejun who got his 15 minutes of fame as being the richest man in China (before he lost 19 billion in 7.5 minutes) is under investigation. If China continues to meltdown from multiple structural issues worldwide, economic growth could take a big hit.
So, what is a global investor to do? Since the experiment by central banks to save the world from a global depression is still playing out, it is even more critical right now to chart first and ask why later. The bigger the compression, the bigger the move. Considering the 10 month sideways action, we are already ripe for a meaningful move.
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