You’re
probably familiar with the seven-year itch. Not the movie with Marilyn Monroe,
but the concept that relationships can lose their luster after seven years.
That
may be what happened last week in China. Investors got itchy and the Chinese
stock market suffered its worst week since 2008. The Shanghai Composite lost
more than 13 percent during the week, and the Shenzhen Composite was down 12.7
percent, according to MarketWatch.
The previous Friday, the Shenzhen had closed at a record high.
Prior
to last week’s correction, China’s stock markets had been VERY popular. So
popular, Chinese firms were seeking to delist from American stock exchanges and
relist their shares on Chinese exchanges, reported The Economist. Plus, the Chinese government rolled out the red
carpet (and waived profitability requirements) for new firms seeking to list on
local stock exchanges.
In
their enthusiasm to participate in rising markets, some Chinese companies are
reinventing themselves on paper. The
Economist wrote:
“But the wider
trend is clear. At least 80 listed Chinese firms changed names in the first
five months of this year. A hotel group rebranded itself as a high-speed rail
company, a fireworks maker as a peer-to-peer lender, and a ceramics specialist
as a clean-energy group. Their reinventions as high-tech companies appear to
have less to do with the gradual rebalancing of China’s economy than with the
mania sweeping its stock market. The Shenzhen Composite Index, which is full of
tech companies, has nearly tripled over the past year.”
June
has been a tough month for China. Earlier in the month, MSCI decided not to add
China’s A-shares, which are denominated in China’s renminbi, to its emerging
markets index because of issues related to Chinese markets’ accessibility.
Greece
hasn’t been faring all that well either. The European Central Bank extended an
emergency $2 billion loan to the Greek government. The Greek people,
anticipating Greece may not reach an agreement with its creditors, which could trigger
default and an exit from the Euro, withdrew more than $1 billion from the
country’s banking system in one day.
Ip! Ip!
OORAY! Greg Ip, Chief Economics Commentator at The
Wall Street Journal, was
blogging about business cycles. He wrote, “After a perplexing start to the
year, the economy is starting to make sense…[Recently released data] has begun
to help solve three puzzles that have hung over the U.S. and global economies
in the last year.” The three puzzles were:
1.
There was no surge in consumer spending in
the United States. Despite a
mammoth drop in oil prices, retail sales were weak and contributed relatively
little to first-quarter growth. However, May retail sales numbers were strong
and numbers for March and April were revised upward. So, consumers appear to be
spending. (The final revision to gross domestic product (GDP), which was released
in late May, showed GDP grew by 0.2 percent during first quarter.)
2.
When workers are in short supply, wages
should rise – but they haven’t. Unemployment is at about 5.5 percent. Employers have jobs open
and are seeking qualified applicants. Yet, hourly earnings had barely improved
at all. The Bureau of Labor Statistics’ Employment Cost Index showed private workers’
compensation grew 2.8 percent for the 12-month period ending March 31, 2015.
That was a big improvement over the previous year’s growth. Government workers
realized a 2.1 percent increase for the same time period, which was a modest
improvement over the previous year.
3.
The bond market hadn’t priced in a rate
increase. Federal
Reserve guidance has been pretty clear. When employment and inflation numbers
align, the Fed will begin to tighten monetary conditions by raising the Fed
funds rate. Regardless, bond market rates hadn’t moved higher – until recently.
Yields on 10-year Treasuries rose from 1.87 percent in early April to about 2.4
percent by mid-June.
Ip summarized, “…in many ways, the world is
behaving as it should. If so, then the next stage is for stock and bond
investors to finally realize the era of zero rates is coming to an end and re-price
accordingly. Do not expect that to be a smooth process… That the world is
behaving normally, however, is not the same as saying it’s back to normal.”
Weekly Focus – Think About It
“Change is the law of life. And
those who look only to the past or present are certain to miss the future.
--John
F. Kennedy, 35th President of the United States
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