Chinese stocks free fall, US markets closed for Thanksgiving
It is going to be a quiet day in the stock market day as US financial markets are closed in observance of the Thanksgiving Day holiday. In addition, markets will close earlier on Friday. In short, it is already the week and investors will likely trim their equity exposure especially following the disappointing economic data released yesterday. On Thursday, US futures were edging lower in thin market conditions. The S&P 500 was moving back and forth around the neutral threshold, while the futures on the Nasdaq and Dow Jones edged down 0.0% and 0.05%.
In China, both the Shanghai and Shenzhen Composites fell sharply. The former slid 2.30% while the latter fell 2.96%. The sell-off in Chinese stocks came on the back of a sharp increase in corporate bonds yields. The government has started its deleveraging campaign last year, which is aiming to reduce the overall systemic risk. Weak and highly indebted companies will therefore feel the blow as it would become more and more difficult to refinance themselves as the credit market tightens. This anticipated tightens of credit conditions is spilling over equities. Further downside adjustment in the Chinese equity market is more than likely. However, investors will reallocate their capital out of weak companies and invest more in companies with a solid financial base. This reallocation will limit the overall sell-off.
No surprise from the FOMC Meeting Minutes
According to the Fed meeting minutes released yesterday, interest rates will be raised in the “near term”. Markets’ expectations regarding a rate hike have not changed much and are still standing above 90%. The fed was clearly not in a hurry to send a very hawkish signal.
The inflation remains one very important topic and in particular the path consumer prices will take. Minutes show that the debate is still open amongst policymakers regarding inflationary pressures. In our view and as we mentioned yesterday we rather believe that there are strong inflationary pressures but the predictable inability to raise rate above a certain level – Risk of bursting the bond bubble would be very high – obliges the Fed to send mixed signals on inflation. Yellen’s comment stating “We are monitoring inflation very closely” seems contradictory with the reality of the monetary policy.
It is going to be very tough to switch a very loose monetary policy from a tighter one. Inflation is now there and will help to kill the massive debt accumulated. Right now, the dollar continues to weaken against the single currency.
