Wednesday, February 28, 2007

Chinese equity market drives world equity markets

It will be a nervous day for traders on the Australian stock market today after a 400 point fall on Wall Street after a 9% decline in Chinese stocks. The US fall was the worst since the first day of trading after September 11, 2001. The Chinese decline was due to expected tighter monetary conditions as the Chinese government attempts to rein in a ballooning economy. The Chinese market has grown strongly and erratically over the past year and investors are starting to doubt the sustainability of the Chinese boom. In the US a decline in the demand for durables by US consumers suggests the consumer-driven expansion may be ending and that the US might be entering a 'low growth' phase.

It is interesting of course that a Chinese capital market correction drives a worldwide capital market correction. The world has changed.

The International Herald Tribune suggested the US plunge could also be attributed to former Fed Chairman Alan Greenspan’s remarks, a day ago, that the US may be headed for a recession this year. In addition, median US home prices fell for a 6th straight month. Finally, there has been recent upward pressure on oil prices which makes controlling inflation more difficult.

Wall Street, has had a big run-up since October and was due for a correction anyway. Hong Kong's Hang Seng Index dropped 1.8%, Malaysia's Kuala Lumpur Composite Index fell 2.8%, Japan's Nikkei fell only 0.52%, but European markets were rattled — Britain's FTSE 100 lost 2.31%, Germany's DAX index dropped 2.96% and France's CAC-40 fell 3.02%.

Update: At 10-32 am this morning the Australian All-Ordinaries had fallen 3.4%. This is a big reaction. By 2-54 pm the fall was 2.7% with large sustained falls in the Chinese-oriented mineral exporters like BHP-Billiton.


whyisitso said...

A well overdue correction. Like the 1987 "crash" it only brought markets back to very recent pasts. Markets can't keep defying gravity for ever. As a self-funded retiree I keep graphs of the Australian market and have been getting concerned at its recent steepness. More a relief that it's happening at a reasonably early stage. The ASX 200 could go back to less than 4500 without any cause for concern.

hc said...

Whyisitso, It is of concern to those who lose money as a result of the fall.

whyisitso said...

I really don't have much sympathy for people who buy at the top and then panic and sell at the bottom. Give me Kerry Packer any day over Alan Bond.