Good News for Chinese Markets? – Chinese equities markets have been plagued by several factors, but one of the more notable ones, in our view, is the constant government meddling. First, there was the unannounced currency devaluation of around 5% last August (and another to start the New Year), and then there was the “circuit breaker” fiasco where a mechanism was implemented in equities trading to halt trading following an intraday decline of more than 5% (it failed miserably). Markets do not like to be meddled with and they especially do not like ‘surprise meddling.’ But, news this week emerged that the government is replacing Xiao Gang, who was formerly China’s securities trading chief. Maybe getting rid of the ‘bad apple’ will help un-spoil the bunch.
British Pound Takes a Pound(ing) – Britain has found itself in a rather precarious situation as it weighs whether it should remain in the European Union. Just to clarify, Britain’s membership is in the European Union – not the euro zone. The former is a unification treaty that allows for visa-less travel and open trade and labor markets – generally a good thing for capital markets and the economy. The latter (euro zone) is the currency bloc that operates under the euro and the European Central Bank, and Britain is not a part of that. Over the weekend, the British Prime Minister announced a referendum set for June 23 to vote on whether Britain stays in the union or not. Most business leaders agree that Britain should stay – isolating itself from the greater European economy would likely lead to rising costs through new trade barriers and would hurt exports. The currency, however, would potentially sustain notable collateral damage as a result of departing the European Union. A Bloomberg survey discovered that most economists believed the pound could fall to $1.35 as the vote nears. The sterling has already been bruised as fears mount over the decision, having dropped to its lowest level since March 2009 to a little under $1.40.
Meanwhile, in Greater Europe – activity in the manufacturing and services sectors hit a 13-month low in February as the euro zone composite PMI index dropped to 52.7 from 53.5 in January. This reading still signals solid expansion, which many media outlets failed to appreciate since February figures widely missed estimates and since these “13-month” lows come amid pronounced market volatility. Even still, the market took the ‘disappointing’ data as a good thing since it means that the European Central Bank may take action to stimulate the economy further in March. This reaction – when the market moves higher on disappointing news – is very similar to how U.S. markets reacted from 2011 – 2013 when the Fed considered, and eventually implemented, QE3.
Disclosure