Monday, January 4, 2016

Stock Markets: China - Barking At The Wrong Tree

(Drivebycuriosity) -  2016 had a false start. China´s stock index, the Shanghai Composite, tanked 6.9%, the European stock markets and Wall Street followed with sharp losses. The markets got spooked by fresh economic data from China.

Over weekend we got 2 separate manufacturing indices for last month, the official Manufacturing Purchasing Manufacturing Index (PMI) and one delivered by a private organization, the Caixin PMI. While the official December PMI was slightly better than the month before (49.7 instead of 49.6 ), the competing index worsened to 48.2 from 48.6 (tradingeconomics). Numbers below 50 indicate a shrinking sector, numbers above signal growth.

The markets ignored that China`s Non-Manufacturing PMI rose to 54.4 in December from 53.6 in November (reported on New Year´s Day marketwatch). This is the best number in 2015 (chart below  tradingeconomics). The barometer covers services including retail, aviation and software as well as the real-estate and construction sectors. This rise shows that China´s service growth is accelerating.

The stronger service sector is overcompensating the weakness in manufacturing because the non-manufacturing sector has accounted for the bigger part of China's economic output for at least two years( Reuters).

Today´s stock market is typical for the tendency to pick always the weak numbers and to ignore the strong data, a tribute to the gloomy snetiment that rules the markets since 2009.

The accelerating services show that China´s economy is right on track. The country is transforming from an industrial & export-focused economy to a modern system like the US, where most of the GNP is fueled by consumer spending. In the US consumer spending is the engine of the economy. China, which still depends too much on exports & industrial production, is on the way to became a modern economy.

Today´s response shows how irrational the herd of fund mangers who rules the stock markets can be. I think that we will get better data in the coming weeks (US service sector, retail sales, company earnings) which should rekindle the bull market again.

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