Saturday, December 3, 2011

Today's Major Market Move - Crazy Volatility in Chinese Equity Market This Past Week

With all the central bank and government shenanigans that took place this past week, I doubt too many people are surprised that these actions ended up causing some significant price moves. Copper futures gained 9%, the Italian stock market was up 11%, the Brazilian Real strengthened over 5% against the US $ and in CDS-land, where many of the largest moves occurred, Austrian swaps fell 25%. Of the 92 different benchmark equity indexes we track (1 per country), only 20 finished in the red with 10 of those only having barely finished negative (<-1%). On the positive side, the top 10 performing benchmark equity indexes for the past week all had gains of 8% or higher. Here's the list:

Click here to go to the live table.
There was lots of volatility up and down in many asset classes last week, but the one equity index that kept popping up in my price movement alerts was the ChiNext Price Index. This index is composed of high growth/high risk equities so one would expect it to have a higher relative volatility but last week had to have been several standard deviations from the norm. Here's the line chart of the price action from last week:
Click here to go to the live chart.

Talk about a day trader's paradise. The ChiNext Price Index ended up finishing the week down (to the tune of -4%), as did all over the other Chinese equity indexes that we track. This to me is a very ominous sign that  the equity market of one of the world's major economies did not join in on the euphoria of the bailout party. China was even an active participant in the intervention fiesta when the Chinese central bank lowered bank reserve requirements on Wednesday. As of the close on Friday, the Shanghai SE Composite, the benchmark Chinese equity index, is sitting right near the 2011 lows.

Click here to go to the live chart.

A more severe downturn in China would create a very interesting scenario. Between Europe, the U.S. and Japan there's a certain amount of cooperation that comes out during crises even though the economies are competitive with each other the rest of the time. I don't think any such cooperation would be forthcoming with China, or at least not without some concession, say for example on Taiwan. It could be that China doesn't need any outside help since theoretically all they would have to do is tap into their hoard of U.S. treasuries. The question is what would they do with the money? Convert to Yuan and destroy the exports? No way. Buy U.S. assets? Not politically palatable in the U.S. Buy commodities? I think this is the only real option but it would most likely create a commodity bubble with a subsequent crash that would be much worse than the one they were trying to avoid.

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