China’s market came back on line yesterday after a week off and had a positive effect on global stocks. Not because of its stock market. It fell. And it wasn’t because of its economy either. Import and export growth data for January was well below expectations.
The boost came from an appreciation of its currency, the yuan. As the Financial Times reports:
‘China’s currency enjoyed its biggest one-day gain in more than a decade as onshore traders returned from the lunar new year holiday to supportive comments from the central bank and a declining dollar.
‘Over the weekend, Zhou Xiaochuan, PBoC governor, shrugged off fears about capital outflows and maintained there were no plans to weaken the renminbi further. “There’s no motive to depreciate the renminbi for the sake of net export expansion,” he said an in an interview with Caixin, the mainland financial magazine.’
Although it’s a simplistic analogy, it seems that stock markets around the world have a big problem with a falling yuan, but they like it when China’s currency strengthens.
This reflects the direction of speculative money. That is, when the yuan falls, it represents a reversal of US dollar flows…which is deflationary for asset prices. And when the yuan rises, it’s the opposite.
That makes sense because yesterday the gold price fell heavily. Over the past month or so, gold has traded much more like a currency and much less like a commodity.
But yesterday and overnight, as hope returned to markets — hope that maybe things aren’t all that bad — the gold price fell sharply, along with a modest fall in the Japanese yen.
Is that it for gold then? Is the bear market about to resume?
Well, gold has certainly had a very good run this year. At some point, it was going to correct. I often find that the media’s reaction to such a correction gives important clues as to what’s going on. It reflects the mood of the market.
For example, following gold’s sharp fall back to near US$1,200 an ounce, Bloomberg’s headline says ‘Gold coming back down to earth’. Gee, that sounds a little scary. Time to sell then…
More from Bloomberg:
‘Gold, the pacesetter among commodities this year, is coming back to Earth.
‘The rally that’s made the precious metal the biggest gainer in 2016 on the Bloomberg Commodity Index faltered further on Monday, with spot prices set for the first back-to-back loss in a month as rising share markets and a firmer yuan sapped haven demand.’
News outlets like Bloomberg are a great reflection of market thinking. Therefore, what they have to say is always in the price. In other words, this is not new news. It is not in any way helpful to react to this.
The benefit in reading the mainstream media is to try and get a sense of the emotional position of the market. In this case, gold has enjoyed a big rally following a prolonged bear market. At the first sign of a correction, the thinking remains negative. Gold is ‘coming back to earth’. The bear market is set to continue.
So I take this as a reasonably positive sign for gold. Sure, this correction could last for a few weeks longer. But as long as the price doesn’t fall back below, say US$1,160, then gold looks good for another move higher, which would put an end to the bear market.
But that’s not the focus right now. The stock bulls are back. The Dow jumped 2%, or more than 300 points, overnight as the rally that started on Friday continues.
The explanation, of course, is the promise of more stimulus. In addition to the words from China’s central banker above (which promised that there was no motivation to depreciate the yuan to stimulate exports) we had Japan reporting negative economic growth…which can only mean…more stimulus!
Then there was the usual rhetoric from European Central Bank boss Mario Draghi, who is clearly in a constant state of readiness. Again, Draghi said he was ready to act if blah, blah, blah…
The market’s problems are precisely because of this central bank willingness to act. If they sat back a little more and let the market work things out we wouldn’t be in this position. But that’s not what they do. They act, react, and act against the reactions. They don’t know whether they are coming or going.
But that won’t stop them. While the market increasingly understands that central banks ARE the problem, they still think they’re a part of the solution.
This makes it extra hard for you when trying to work out an investment strategy. Do you play it safe with Vern Gowdie — cash up and wait? Or do you go the other way and punt on small caps or resources in the expectation that central banks will eventually destroy currencies and inflate markets.
I suspect it will be both. For the ‘when’, I consult the charts. In a financial world as complex as the one we are in, personal opinion doesn’t count for much. No person can consistently pick the market’s twists and turns.
If you look at a chart of the Dow, for example, there is no need to get excited about the recent rally. It’s just recovering from a big sell-off. It’s clearly in a downtrend. The positive is that the recent sell-off hasn’t taken out the lows from last August.
My personal view is that the low will give way in the coming months and the market will take another leg down before stabilising. But such a view is about as useful as a pocket on a singlet.
Being wedded to an outcome that may not happen is, in my opinion at least, a dangerous strategy. I’ll have more to say on the psychological aspect of this later in the week. Until then, enjoy the rally!
For Markets and Money