After an astounding week of volatile swings, led primarily by instability from the Shanghai Composite, many are now questioning what lies ahead for both China and the London bourse.
Despite the late improvement in market sentiment, last week was a watershed moment for the Chinese economy, as a pin managed to find its way into the balloon that is the Shanghai Composite. Subsequently, the selling started and didn’t finish until the negative sentiment had spread its way across the worlds various exchanges.
The initial reaction of the Chinese government was to introduce a range of stimulative measures, including direct fund injections, to assist in slowing the tide of selling. The subsequent cuts to both interest rates and the RRR certainly helped to stimulate some buying but the damage had already been done to the market sentiment. Despite the exchange closing higher on Friday, there are ominous signs that the equity rout is far from over.
In fact, this weekend saw statements from the Peoples Bank of China (PBOC) that they would cease intervening in the market. Obviously they have discovered what countless other traders have known during periods of sharp market corrections, you can’t catch a falling knife. Subsequently, as I write, the Shanghai exchange is down over 2.00% as sellers clamour to exit their equity positions.
The reality is that the continued rout in Chinese equities is likely causing significant volatility for the FTSE 100. The problem is that capital has become increasingly global as it seeks yield in emerging and exotic markets. Subsequently, the connection between world economies is significantly closer than it has ever been before.
There is also a growing body of evidence that suggests that the QE undertaken throughout the west has largely made its way to Asia, where it has been most acutely felt in the equity and debt markets. So it is subsequently short sighted to view the Chinese equity collapses as a solely Chinese phenomenon. It is indeed the case that margin lending has fuelled much of the growth in securities demand but so has western QE as it spreads throughout the global macro-economy.
Ultimately, world equity markets are likely in for a tough few weeks as a range of corrections and revaluations take place. This will especially be the case with the FTSE 100 where this is the potential for Asian exposure through the banking sector.
However, the market conditions, in particular with the FTSE, are less about any form of `Tulipmania’, and are more corrective in nature, due to the giant amounts of capital that are slopping around world markets seeking yields. Subsequently, given that selling pressure is still evident in Shanghai, it is almost a given that the markets signalling mechanism will lead to the FTSE opening significantly down.
So be prepared for a bumpy ride over the next few weeks but the old adage of a `good investment is a long term investment’ is as true today as it ever was.