China Pause
Same as the day before, yesterday we saw mostly “better than expected” data from the US. Most notably new home sales were up 9.6% in July. Durable goods orders came 4.9% higher in July vs. 3% consensus and -2.5% the month before. Better than expected orders were mostly result of US government “cash for clunkers” program from which, by the way, mostly benefited Japanese auto makers. Durable goods ex transportation came at 0.8% vs. 0.9% consensus and 2.5% the month before.
Although better than expected I don’t see this data as a sign of recovery priced in equity at the moment. Market again failed to move up on the news.
Interesting developments on the court case in which Bloomberg sues Board of Governors of the Federal Reserve System to disclose daily reports on borrowing by banks and other financial institutions. Bloomberg story: Federal Reserve Seeks Delay in Disclosure of Emergency Lending
FED is trying real hard to keep the information confidential. I believe them when they say „The Fed and U.S. banks would suffer irreparable harm if details of the loan programs were made public“. So, I think we will never find out who got rescued by the FED or maybe who is on life support by the FED at the moment. In case the data, none the less, comes out of the FED it could impact the market seriously.
Interesting developments in China. I already mentioned enormous expansion of money supply in China. From the start of the 2008 money supply measured by M2 expanded by 2.9 trillion USD. More than US, Euro Zone and Japan combined. The Shanghai Composite enjoyed strong run doubling from October 2009 and we even have now pig farmers speculating in copper. Bloomberg story: Copper Stockpiled by China’s Pig Farmers May Be Sold.
From the top Chinese stocks have came down 14% and we have seen extremely high volatility in last week or so. I attribute the fall to the plans o Chinese Central bank to impose higher capital requirements for banks, preventing them to invest in stocks or financing stock purchases. Looking at the chart the trading range is contracting, so we could have a breakout either way.
Chart 1. Shanghai Composite
Coming down to the interesting part of China story. Yesterday Chinese Premier Wen Jiabao announced curbs on steel and cement production. At the same time we have everything connected with steel falling: all steel products, iron ore, coke and dry freight. Iron ore stockpiles are hitting the highest level from 2006.
Chart 2. Baltic Dry Index
Looks like the over capacity is threatening to end the recovery in an adverse way and the Chinese government is trying to cool off the economy with reduced credit availability and capacity curbs. Bad news for the whole Asia which is relying on China as a trading partner and bad news for the industrial commodities.
Baltic Dry Index, Cement, China, China Money Supply, Copper, FED, New Home Sales, Shanghai Composite, Steel, U.S. Durable Goods Orders