Thursday, 1 October 2015

Samurai Summary: Top Tweets 01/10/2015

A surprise number in the Chinese PMI helped lift markets on the first trading day of quarter as some believe the stimulus measures put in place by Chinese authorities are starting to take effect in the economy. Although manufacturing remains in decline there was a sigh of relief from many corners as investors come to grips with a longer than expected economic downturn.  

However nothing takes away from dismal quarterly performance Chinese equities have experiencing due to worries over a protracted slowdown. The quarterly performance comes in worst than that of previous quarters in 2008 indicating the seriousness of the concerns.

The boosted number we saw today in the PMI is a green sprout in a very big field full of negatives weighing down optimism in the world's second largest economy. If we were to see a change of sentiment we'd need to see an extended period of good economic data, not just one reference point, that would prove that measures are working.

What the situation we find ourselves in now does show is that there's been a gross exaggeration in the expectations on the Chinese economy but we should not take away from China's ability to modernise an economy at blinding pace, speeds which world economies have never seen before but we should not let illusions come in between the realities on the ground.

The so-called "middle ground"approach should be applied with the basic principles of economics that the world has come to know and accept as the norm. Yes, China is an exception given the sheer numbers of people that have become economically liberated but nothing stops the laws of economics from throwing the balance into question. I think it is this dilemma that has led the world into placing greed before practicality.

The delicate position world markets have found themselves in is one which in which the debate around preventing a Chinese financial system shock is of pivotal importance. The reactionary measures put in place to the existing shocks felt have led to some interesting developments in other different asset classes, in this case corporate bonds.

Because the PBOC (People's Bank of China) has utilised every financial artillery weapon it has, interest rates have found themselves at multi year lows. As a result of this the spread between government bonds and corporate bonds at their lowest levels in years raising concerns that the credit risk is not being fully accounted for.

I truly hope this is not the case as we've seen the effects on global markets when confidence begins to break down, it has the potential to send shock waves throughout. It's a story that is developing and for now hasn't gained much talk time but one I will be following closely.  
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