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WTI flirts with the red zone

Published Wednesday, July 29th, 2015

Imagine the reaction if the British or US governments were to announce that they would enter the market and buy shares in the event of a major fall in the FTSE or S&P. The investment community would be horrified at the interference with market forces and the stock markets would be viewed in a very different and unfavourable light. That is what is happening in China – the government is running the stock market and they must be aware of the damage to credibility that their actions have inevitably caused. MSCI must be mighty relieved that they decided not to include Chinese mainland shares in its EM index.

Does the Chinese intervention signal real fears about the impact of retail losses on social cohesion in an already restless society? Or is it that a stock market collapse poses a systemic financial risk with 34% of the Shanghai and Shenzhen free float funded by margin debt? Bank reserve ratios could be cut again to unleash more credit but the debt to GDP level is already dangerously high. The China “national team” got its act together overnight with government buying taking the market to a +3% close following a 1% dip earlier in the day.

It is Federal Reserve day with another non-announcement expected on interest rates. The problem with having made any increase data dependent is that the data is variable and historic, always providing an excuse to delay a decision. Yesterday the Conference Board consumer confidence index for July showed a big fall to 90.9 from 99.8 in June and was well below a Reuters poll forecast of 100. If non-domestic considerations play a part then events in China and heightening emerging market vulnerabilities provide another reason for delay.

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Posted by David Hufton