The Overnight Report: China Can't Stop It Either
By Greg Peel
The Dow closed up 38 points, or 0.3% (37 points shy of the high), while the S&P gained 0.5% to 1525 (first up-Monday in 2013) and the Nasdaq added 0.4%.
Talk of a "hard landing" for China that began a couple of years ago has been centred on two main factors ? the property bubble and the extent of local government debt. When the Chinese government began introducing measures a while back to curb rampant property development and put the brakes on unfettered bank lending initially funded by China's massive post-GFC fiscal stimulus package, we were all going to hell in a hand basket.
We didn't, of course, and we entered 2013 with a new Chinese regime and refreshed hopes of a reversal in the Chinese slowdown and a recovery to more moderate growth levels than those seen in the past. The Chinese government is cognisant of the need to carefully manage the property market and other lending so as to avoid both a bubble and a bust. It's not an easy task and in typical Chinese fashion, with the benefit of absolute power, the government has been chipping away here and tweaking there to achieve its goals.
Last weekend's move by the new government to tighten lending and increase taxes on second, as opposed to first, home buyers is part of a general push to ensure China's emergence does not mean an emergence into a Western style rich get richer, poor get poorer dynamic. The curb on second (and presumably third etc) home rollovers will no doubt slow property development, and thus slow raw material import demand, but will also address the problem of "ghost cities" and a bubble many are still worried could burst. On the flipside, the government is pushing on with social housing construction.
It is assumed the restrictions introduced on the weekend are only considered temporary and could be eased again down the track if it is deemed safe to do so. Beijing can taketh away and then giveth back again. Beijing has also declared that the level of local government debt is under control and being closely monitored.
The significance of the new restrictions was a bit lost on the world until the Shanghai market began falling yesterday. The Australian market, which was already on a 30 point handicap start due to dividend payments, kicked lower as material sector investors dived for cover. The sell-off was somewhat typical of a market that has run very hard to the point that nervousness has set in.
Not helping local sentiment was a string of unnerving economic releases yesterday including another rise in job ads, a fall in building approvals (albeit a rise in single home approvals) and a 1.0% fall in company profits in the December quarter to mark a 7.6% fall for 2012. The latter is significant leading into tomorrow' GDP result, but also fundamental to the stock market. Australian stocks have rallied on multiple expansion alone, ie sentiment, and unless that expansion is later backed up with improving earnings then current valuations are little more than a fantasy.
Wall Street also opened lower, with the Dow trading down 59 points by around 11am. But yet again, the buyers rolled in. It was a wobbly ride back, but Wall Street continues to struggle for reasons to slide. In closing up on the session, investors also shrugged off the sequester ? another hell in a hand basket event ? having become by now seemingly impervious to US debt/tax fear mongering. Uncle Ben's got your back.
Italy still does not have a government and possibly won't. There is now talk of a rating downgrade and the comedian in the candidate mix is advocating a return to the lira. Following more weak eurozone data the pressure is now on the ECB to act after its meeting on Thursday by cutting its cash rate or some other easing measure. The BoE will likely increase QE following some terrible numbers. The RBA will sit tight today.
The Aussie fell a full cent in the panic generated around China yesterday, but overnight trade pushed the currency back up again to be only slightly lower over 24 hours at US$1.0187. The US dollar index is little changed at 82.22, but gold has fallen another US$6.10 to US$1569.70/oz.
One might have expected base metals such as copper to tank on the Chinese property news (as well as steel components), but after a week of falls last week, London base metals closed insignificantly mixed last night. The oil slip continues, with Brent down US31c to US$110.09/bbl and West Texas down US70c to US$89.98/bbl. It was only weeks ago it was assumed WTI was going to hit 100.
Spot iron ore continued its pullback yesterday, down US$1.80 to US$148.80/t.
Was the local market slide overdone yesterday? The SPI Overnight is up 32 points or 0.6%.
There's a few more ex-divs today locally although nothing like yesterday's collection, while December quarter trade balance data will provide another lead in to tomorrow's GDP. The RBA will meet today and do nothing.