The ex post facto headline writers are out in force this morning as we see the first real selling pressure in SPX futures in more than a week. Some sort of pullback after a 100 point advance in the SPX is quite natural, with little news likely for the decline. But in the search for a cause, the overnight media has keyed in on China.
Chinese money market rates moved higher as the Chinese central bank is clearly trying to stymie speculative practices by banks and lenders. It has periodically let rates spike over the past 6 months. Chinese stocks fell more than 1% overnight, commodities are mostly lower, and the Aussie dollar is down about 1% vs. the USD.
After a tough first half of the year, Chinese stocks have broadly been on the mend since early July. Analysts are split as to whether it’s a legitimate turnaround after a temporary slow patch, or simply the latest in a series of dead cat bounces.
First, the Shanghai composite is still down 4% in 2013, a dismal performance relative to global equity markets. The index is little changed in the past 5 years:
However, other Chinese-related assets have shown more bounce in their step recently. The Aussie dollar vs. the USD reached its highest level since early June overnight (before reversing hard), copper has hung in there, and U.S. metals-related stocks are near a 6 month high. Yet, all of these charts look more like assets bumping up against resistance rather than assets about to break out:
XME (S&P Metals and Mining ETF in the U.S.):
Given the clean breaks we’ve seen in other parts of the world (most notably Europe), we’d given bullish positions in those regions much more benefit of the doubt than bounce-back plays in Chinese-related stocks or regions. Chinese stock prices are still indicating an economy working through abundant overcapacity built up over the last decade.