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Chinese shares – based on the benchmark Shanghai Composite Index – slid by 6.5% yesterday morning.
The last time China’s shares went into a mini-slump, the rest of the world followed. But markets pretty much shrugged it all off yesterday.
Why?
Probably one of the main reasons yesterday’s little hiccup in China was largely ignored by the wider markets is because there was a very good reason for stocks to fall. No one quite knew why the 9% plunge back in February actually happened, so investors immediately panicked that the big sell-off they’d all been anticipating was suddenly happening.
This time it’s obvious why Chinese stocks fell, so no one feels the need to panic. It’s nothing to do with the yen carry trade, or global inflationary pressures, or geopolitical disaster – the Chinese government simply trebled stamp duty overnight. It’s still much lower than it is in Britain – rising from 0.1% to 0.3%, compared to our 0.5% – but even so, when your trading costs jump like that, even the most ardent speculator has to pause to think for a moment.
Of course, the fact that the market has already risen by more than 50% this year means the speculators probably won’t stop to think for long. After all, who cares about 0.3% stamp duty when you’ll probably see a return 100 times that size inside your first six months of trading? At least if past performance is anything to go by.
So this is another of those moves by the Chinese government which says – “we want everyone to know that we’re aware of this stock market bubble, but we don’t actually want it to burst.” And it’s not every day as a government that you get the chance to triple a tax and can still feel confident that people will happily pay it without rioting in the streets. After all, this is a bubble, so it’s the only responsible thing for the authorities to do.
Besides, they’re probably feeling a little bit cheated by the stock market boom. A World Bank report has found that the Chinese government could have got a lot more for all those state-run companies that have listed on the stock market. The World Bank reckons Beijing has lost nearly $10bn this year alone, because it has priced its assets too conservatively when they float.
For example, on its first day of trading, government-controlled lender Bank of Communications saw its share price jump by 70%, suggesting that its initial public offering (IPO) price could have been pitched at least a little bit higher without crimping investor demand. .
Of course, you could argue that maybe the Chinese have a better idea of exactly how much their banks are worth and are just glad to have them off their hands. We’ll just have to wait and see how it all pans out when the stock bubble does finally pop.
In other news, it looks like we’ll be seeing another interest rate hike here in the UK next week.
David Blanchflower, the one Monetary Policy Committee member who up until this month‘s interest rate decision, had never voted for a rate rise, explained his change of heart in a speech last night. Although he says that wages are yet to rise, and he reckons they are unlikely to, he voted for a hike to “ensure that inflation expectations remain anchored, given rising food prices, recent further increases in oil prices, more robust world growth” and of course that target-beating inflation figure in March.
Mr Blanchflower also reckons that inflation data does “seem to point to an upside risk”. If that’s how the most ’dovish’ member of the committee is thinking, there doesn’t seem much chance of rates staying on hold at the June meeting.
Turning to the stock markets…
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In London, the FTSE 100 sank as low as 6,533 in intra-day trading yesterday as sharp declines in Asian markets hit sentiment. However, a late rally prompted by a stronger start on Wall Street saw the blue-chip index end the day just 4 points lower, at 6,602. For a full market report, see: London market close.
Elsewhere in Europe, shares also closed lower in response to China’s mini-slump. The Paris CAC-40 was down 14 points to 6,042 and the German DAX-30 was 16 points lower, at 7,764.
On Wall Street, stocks bounced back from earlier weakness to record levels yesterday. The Dow Jones added 111 points to end the day at 13,633, a record high. And the S&P 500 hit its highest-ever closing level, ending the day 12 points higher at 1,530. The tech-heavy Nasdaq, meanwhile, was 20 points higher, at 2,592.
In Asia, markets rallied today following yesterday’s losses. The Nikkei added 287 points to close at 17,875 and the Hang Seng was 264 points higher, at 20,558.
Crude oil had slipped to $63.34 this morning and Brent spot was at $68.28 in London.
Having dipped over $3 in New York yesterday, spot gold was back up to $656.60 this morning. Silver, meanwhile, had risen to $13.22.
Turning to currencies, the pound was last trading at 1.9749 against the dollar and 1.4694 against the euro. And the dollar was upto 0.734 against the euro and 121.67 against the Japanese yen.
And in London this morning, building society Nationwide announced that house prices had risen at a slower rate in May than in April. The average house price rose 0.5% to £181.584 compared to a 0.9% rise the previous month. Nationwide’s chief economist Fionnuala Earley announced that the highest UK interest rates in six years should ‘signal caution to those thinking about stretching themselves to get a foot on the ladder’ and predicted a ‘measured cooling’ in the market.
And our two recommended articles for today…
Markets are wobbling – but when will they fall?
– From overheating Chinese equities to cooling commercial property and consumer spending in the UK, there is plenty to concern stock market investors. For John Robson and Andrew Selsby of the Onassis Newsletter’s take on the big market developments of the moment – and what their ‘four horsemen of stock market apocalypse’, the key market indicators – are telling us, read: Markets are wobbling – but when will they fall?
Why I’m the last of the Tokyo bulls
– General sentiment may have turned negative on the Japanese stock market, but Merryn Somerset Webb remains bullish. Here she explains why things aren’t as bad as they may seem – and suggests a brave investment for fellow bulls: Why I’m the last of the Tokyo bulls