China’s new day dawned with aggressive stock selling even as its central bank cut interest rates for the fifth time since November and shored up bank reserves. But much of the rest of the globe—including the United States—returned as early buyers after several knee-buckling sessions. The stock market bounce (oil and the dollar are nosing higher, too) is testament to expected continued volatility as international markets assess another boom-bust cycle for growth-engine China.
This is market action that calls for small, nimble trades for those who prefer a very short-term horizon; as we’ve preached, don’t go “all in” or “all out” of positions in these conditions. As for those dug in for the long haul, it’s time to refocus on otherwise largely solid fundamentals (and in some instances, prettier valuations) up and down select U.S. stocks.
More tests are likely in coming days. The broad S&P 500 (SPX) could make a run for 1950, a formidable line of resistance. Pay close attention to the CBOE Volatility Index (VIX) (figure 1). Will VIX track the moves in the broad stock indexes, or find an underpinning of demand given so much uncertainty? Watch bonds, too. That market’s percentage change has not aligned with the big moves in stocks.
Not Just Stocks to Watch
Plunging oil prices have stabilized, for now, below $40 a barrel. That’s a price level that some industry analysts think could help sop up the extra crude supply sitting around. Stability there could help the energy-heavy S&P 500 (SPX) after it closed Monday down nearly 4% (figure 2).
China Story May Not End Soon
China’s government had been pumping up stock returns with pro-growth initiatives for much of the year. But cracks started to show. Chinese factory activity contracted at its fastest pace in almost 6 1/2 years, data issued earlier this month showed. China’s central bank unexpectedly devalued its yuan currency earlier this month, a move meant to goose its export economy but that did little to seal shut the trap door in the stock market.
Japanese Finance Minister Taro Aso said this week that Chinese stocks, which had more than doubled in the six months to May, had been a bubble that was now bursting. And, he said, there’s “suspicion on whether China's official GDP figures reflect the real state of the economy," according to Reuters. Officials from around the globe are quick to dismiss comparisons with the 2008 Global Financial Crisis or the 1997/98 currency crisis in Asia.
Companies chimed in over the past few days, which may be helping to restore some calm. Apple (AAPL) CEO Tim Cook took the rare step of commenting on the tech giant's business midway through a financial quarter. Reuters says Cook emailed that iPhone activations in China had accelerated over the past few weeks. "Obviously I can't predict the future, but our performance so far this quarter is reassuring. Additionally, I continue to believe China represents an unprecedented opportunity over the long term," Cook wrote, according to the news report.
Interest Rate Scenario
Of course, there’s more to this story than just China. Also front of mind: a commodities price plunge, although that too hinged in large part on Chinese demand; high stock valuations mired in a sideways trade; and the gully across the big boys’ interest rate policies. All this market noise packs an extra challenge for a Federal Reserve that many thought was ready to push the button on the first U.S. interest rate hike since 2006 next month.
Now? No one’s so sure. At least temporarily, global demand for U.S. Treasuries as a perceived short haven drives up prices and holds back interest rates. But big Treasury customer China could divert resources back home. If so, the U.S. bond market loses one of the props that had held down rates.
Micro News, Too
It’s hard to notice within the broad-market news, but there are company-specific headlines circulating.
One of them, Best Buy (BBY) early Tuesday reported a better-than-expected 12% increase in Q2 profit. Strong sales of large-screen TVs, appliances, and phones offset weakness in tablets, the company said. Troubled Best Buy’s cost-cutting has started to payoff but investors may also cheer this sign of consumer spending
There are many moving parts to the market these days. Stay alert for obstacles and opportunities.
Good trading,
JJ
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