Last week was an excellent test for the overall bull market. While data out of China pointed to decelerating growth, US equities held up surprisingly well. High oil continues to be a challenge, but except for a few key sectors like Airlines, the broad economy still seems to be humming along.
The last time global equity markets were falling at this pace (on a growth scare) was the fall of 2011. That time, after a big push lower, November saw a mass co-ordinated easing by central banks to save the world... stock jumped, the global economy spurted into action briefly, and all was well.
Small and mid-sized firms in China have been hit harder by the weakening economy compared to large corporations. According to Shankar Sharma, India has successfully managed to retain its balance and to stimulate economy growth. Goldman Sachs downgraded its rating on Indian stocks to “underweight”. Following a six-day consecutive declines the BSE benchmark Sensex managed to erase all losses by gaining 179 points.
The holiday week saw the dollar consolidate against most of the major currencies. The yen was the main exception as its losses were extended under the aggressive signals coming from the new Japanese government.
The last 7 days have seen the unstoppable 'sure-thing' one-way bet of the decade appreciation trend of the Chinese Yuan reverse. In fact, the 0.95% sell-off is the largest since 1994 (bigger than the post-Lehman move) suggesting there is clear evidence that the PBOC is intervening.
The much-denied hard landing in China is now underway with weakening data everywhere one looks. Today there is More Bad News For China as FDI Falls.
Foreign direct investment in China fell to the lowest level in two years in July, fueling concern that waning confidence in the nation’s growth prospects may restrain any economic rebound.
Recent economic reports from China are, at the least, mixed. The responses to Friday’s GDP report are illustrative.
From IHS-Global Insight (Xianfeng Ren):
China has reported the worst quarterly GDP growth, 7.6%, in almost three years. This is a less vicious downslide compared with the Global Financial Crisis if measured by peak-to-trough deceleration, but nearly as bad as in the Asian Financial Crisis.
By Labutes IR:China's economic growth has been amazing over the last few years, higher than 8% annually for the last seven years. However, the most recent economic data out of China has surprised on the low side and has increased the odds of an economic hard landing.