Stock Market Relapse Because Of China?

by Mike Holman

spring roll

Intelligent Speculator is a blog about investing, news and comments about the markets and the relevant news. It also supplies users with free stock picks that will hopefully help you get ahead. You can visit the blog at IntelligentSpeculator.net and subscribe to the RSS feed here.

It was mid-November, the market had reached new lows with the S&P 500 closing under 800 points and the economic news was not looking good. Then, something very odd happened as the markets started to rebound. Sure, there had been some positive news such as the end of uncertainty of a new US government and more information about the massive stimulus plan of the US government.  But economic numbers related to demand, consumer confidence and especially employment looked depressed.

However, the markets seemed to shrug off (ignore?) those negative factors very easily as they shot up 25% in a few weeks.  The market rebound hardly seemed justified .  Then the stock markets started dropping because of more bad economic news, the now famous Madoff fraud and more dire economic   news. So markets went back on their road towards new bottoms, with even the new year not being able to stop much of that momentum.

And just last week, with the S&P500 now on a losing streak and standing at 850, some very bleak predictions were released from French Bank SocGen. They have been gathering information from one country that has not received that much coverage given its importance; China. Say what you want about the communist state, it has been gaining importance in the global picture over the past few decades. In fact, as it has rapidly gained its spot in the biggest world economies, China generated much of the world growth over the past decade with growth over 10% year after year.

China is now encountering some severe structural problems that are slowing its economy in a way that will impact the world economy, especially with China’s importance in world trade. In fact, the OECD (Organisation for Economic Co-Operation and Development) has released some economic indicators that look very depressing and could signal an important slowdown. The Chinese authorities could devalue their currency. “It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan” wrote Albert Edwards of Societe Generale

What would be the consequence of such a change? In fact, Societe Generale spoke of the increasing risk of a global recession and in their opinion, this could mean another 40% drop in the major stock market levels.  Perhaps it seems like a very negative perspective but I am fearful of buying until the market lows of November are tested or until economic data starts to improve, there is just not much positive and no reason really for the stock market to improve at this moment. There is always a risk of missing a positive move but for now, I’m ready to remain on the sidelines or do as I have in recent weeks, do some long-short trading which should not be as affected by a market downward move….

What do you think – is China going to drag the stock markets down further or has it’s problems already been factored in?

Photo credit – taiyofj’s photostream.


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