HiWayFX
Company Representative
- Messages
- 15
The Market Chaos Is All Because of China
First, on Monday, US stocks had a flash crash-like open where the S&P 500 plunged out of the gates, only to recover for the rest of the regular trading session, and plunge further near the close. Today most media outlets and stock analysts were optimistic with headlines such as "Stocks Have Their Biggest Rally This Year," before the Dow and S&P crashed at the close again.
15-minute chart of S&P 500 Index
Given the lower and lower trading volumes on US exchanges since 2008 and the start of QE, the closing price action must be considered as the most important price action of the day. Day after day the market shows it's hand only in the last hour of trading and sometimes even the last minutes. This is why analysts are constantly getting it wrong, because the market usually does something entirely different at the end of trading, and also because futures markets stay open an additional 15 minutes past the cash market close.
Mohamed El-Erian summed it up well on his Facebook page today;
Today’s reversal in US stocks was particularly worrisome because it came after a seemingly perfect sequential setup: (i) Stabilization in Asian stock markets (outside of China); (ii) monetary policy stimulus by the PBoC, China’s central bank; (iii) a strong bounce in Europe; and (iv) a solid start and mid-session for US markets.
Basically the same thing is happening in China's economy as happened in 2008 with the US economy. And back then, when the US caught the flu, the whole world caught a cold. With China being the world's second biggest economy after the US, we will likely see European and US markets continue to roughly follow the situation in China.
Today, China is having the long-awaited hangover of a credit fuelled boom which was aided and spun higher by the Chinese government itself. In 2008, this is the same thing that happened in the US. What followed was a desperate and quickly conceived plan to prop up the economy with further credit stimulus (quantitative easing and interest rate cuts).
If history is rhyming, then the next chapter in this story is for the communist party in China to take similar steps, and cut borrowing costs and stimulate credit markets with cheap money. Given the current experience of quantitative easing in the West, this is a process which will likely stretch out years into the future and will distort and manipulate markets for years to come.
First, on Monday, US stocks had a flash crash-like open where the S&P 500 plunged out of the gates, only to recover for the rest of the regular trading session, and plunge further near the close. Today most media outlets and stock analysts were optimistic with headlines such as "Stocks Have Their Biggest Rally This Year," before the Dow and S&P crashed at the close again.
15-minute chart of S&P 500 Index
Given the lower and lower trading volumes on US exchanges since 2008 and the start of QE, the closing price action must be considered as the most important price action of the day. Day after day the market shows it's hand only in the last hour of trading and sometimes even the last minutes. This is why analysts are constantly getting it wrong, because the market usually does something entirely different at the end of trading, and also because futures markets stay open an additional 15 minutes past the cash market close.
Mohamed El-Erian summed it up well on his Facebook page today;
Today’s reversal in US stocks was particularly worrisome because it came after a seemingly perfect sequential setup: (i) Stabilization in Asian stock markets (outside of China); (ii) monetary policy stimulus by the PBoC, China’s central bank; (iii) a strong bounce in Europe; and (iv) a solid start and mid-session for US markets.
Basically the same thing is happening in China's economy as happened in 2008 with the US economy. And back then, when the US caught the flu, the whole world caught a cold. With China being the world's second biggest economy after the US, we will likely see European and US markets continue to roughly follow the situation in China.
Today, China is having the long-awaited hangover of a credit fuelled boom which was aided and spun higher by the Chinese government itself. In 2008, this is the same thing that happened in the US. What followed was a desperate and quickly conceived plan to prop up the economy with further credit stimulus (quantitative easing and interest rate cuts).
If history is rhyming, then the next chapter in this story is for the communist party in China to take similar steps, and cut borrowing costs and stimulate credit markets with cheap money. Given the current experience of quantitative easing in the West, this is a process which will likely stretch out years into the future and will distort and manipulate markets for years to come.