Fears of Inflation and Slowing Growth Grip Investors
By Gabriel Gan
For months already, the stock market has been feeding on inflation fears as China – the world’s growth engine – grapples with runaway inflation that seem too hard for the Chinese government to try and rein in.
This theme has been dominating the stock market since late year when China hiked interest rate for the first time in October. Since then, the Shanghai Composite Index (SSE) has retreated from a high of 3,186 points and has never looked back. It then hit a low of 2,661 just before the Chinese New Year and reached 3,067 only in April this year after the Japan earthquake.
The SSE is now trading below 2,900, at 2,870 points at the time of writing, heightening fears that it could test the support levels at 2,750 and 2,660 if the index does not cross 2,900 points soon.
As for the Straits Times Index (STI), the charts are almost a mirror-reflection of the SSE as well as the Hang Seng Index (HSI). This only goes to show the positive correlation between the three stock markets, so much so that Singapore’s very own General Election did precious little to influence the stock market.
Singapore, too, faces it own problems with inflation, as rising standards of living especially in the public housing sector has raised some concerns. Although Singapore does not manage its inflation by using interest rate as a tool, the Monetary Authority of Singapore manages inflation by allowing the Singapore Dollar to fluctuate against a basket of currencies that are not known to the public.
The strengthening Singapore Dollar versus the US Dollar is a very good example of the government trying to tame inflation by making imports cheaper, as the Greenback is widely used as a currency to facilitate trade. On the other hand, however, a strong Singapore Dollar will make our exports less competitive and more expensive for end-users in overseas markets.
Why Is Inflation So Domineering?
I have stated time and again that inflation is good only when an economy is in recession and trying to get out of it. When there is growth, there is inflation, hence this is good for the US especially when the US government is trying to engineer growth so as to a spur employment.
The US economy has yet to be faced with inflationary pressure although the higher cost of energy has caused consumer prices to increase while Ben Bernanke, in his statement, has commented that inflation is still not a problem adding that energy and commodity prices are likely to come down in the second-half of this year.
So, an economy with little or no inflation has pushed its stock market (Dow Jones Industrial Average – DJIA) up by 8.7% since the start of this year while one that faces serious inflationary threat is flat for the year. The SSE closed at 2,808 points on 31 December 2010 and closed at 2,872 points on 18 May.
The other Asian markets like Japan, Hong Kong and Singapore are all in negative territory for this year, signaling investors’ fear that inflation, which would ultimately result in higher interest rates, would drag down growth and, eventually, the economy.
Of the three blocs: US, European Union and Asia emerging economies, the US has yet to step into inflation territory while Europe has started to feel the strains of inflation. At the highest end of the inflation “hierarchy”, Asia and other emerging economies have already felt the strains beginning from late last year hence explaining why the stock markets have underperformed the mature markets in Europe and US.
When inflation becomes a problem, interest rate will rise and cost of living and doing business will also escalate. With so much “cheap money” in the financial system as a result of the US government’s policy, funds are constantly on the lookout for places to park their money hence Asia, with its high growth rate since 2010, have benefited from this trend.
At the end of 2010 when inflation became a problem for Asia, especially China, fund started to flow out and began to park their money in the financial markets of Europe and US where growth was coming back and inflation not yet a problem.
Should the US change its policy and start to hike interest rate or even put an end to further stimulus measures, it would drain money away from the financial system and spark off a round of selling.
Slowing Growth Or Temporary Blip?
China continues to grow but some segments of the economy are showing signs of slowing down. There have been conflicting signals from its economy but the main theme that occupies the minds of policymakers continues to be that of inflation.
Inflation in April at 5.3% was slightly off the 5.4% in March but this figure is still way off the official target of 4% for the full year. The economy still grew at 9.7% in the first quarter, which also means that it is still growing at a much faster rate than the 7% that Premier Wen has targeted.
With China’s economy still looking strong and inflation seemingly untamable, China looks set to proceed with its policy of gradually hiking rates, putting a cap on certain strategic items and raising banks’ reserve requirement.
China’s economy and stock market is faced with a dilemma: too strong a growth will invite more measures to cool the economy while slower growth will probably spark off fears that demand from China will slow and this will in turn drag down the entire global economy.
In the Europe and US, there are already signs and worries that the economic growth is tapering off, which has made the situation even more precarious now that worries about the PIIGS have resurfaced. Coincidentally, the slower economic growth is coupled with talks from the Obama Administration of lifting the debt ceiling so that the US government can borrow even more money to give the economy another boost in preparing for next year’s presidential election.
After a year of solid performance, both in the economy and the stock market, are we in for a “correction” on both fronts?
Much lies in China’s ability to tame inflation as well as the US government’s ability to persuade Congress in raising the debt ceiling. Until all these issues are addressed, the stock market is unlikely to rally or correct in a big way.
We can only wait for more signals and news from the China and US economies before deciding what to do. Inflation for China is still the key while a weakening US economy would be the last thing we want to hear.
Source/转贴/Extract/: www.sharesinv.com/
Publish date:20/05/11
By Gabriel Gan
For months already, the stock market has been feeding on inflation fears as China – the world’s growth engine – grapples with runaway inflation that seem too hard for the Chinese government to try and rein in.
This theme has been dominating the stock market since late year when China hiked interest rate for the first time in October. Since then, the Shanghai Composite Index (SSE) has retreated from a high of 3,186 points and has never looked back. It then hit a low of 2,661 just before the Chinese New Year and reached 3,067 only in April this year after the Japan earthquake.
The SSE is now trading below 2,900, at 2,870 points at the time of writing, heightening fears that it could test the support levels at 2,750 and 2,660 if the index does not cross 2,900 points soon.
As for the Straits Times Index (STI), the charts are almost a mirror-reflection of the SSE as well as the Hang Seng Index (HSI). This only goes to show the positive correlation between the three stock markets, so much so that Singapore’s very own General Election did precious little to influence the stock market.
Singapore, too, faces it own problems with inflation, as rising standards of living especially in the public housing sector has raised some concerns. Although Singapore does not manage its inflation by using interest rate as a tool, the Monetary Authority of Singapore manages inflation by allowing the Singapore Dollar to fluctuate against a basket of currencies that are not known to the public.
The strengthening Singapore Dollar versus the US Dollar is a very good example of the government trying to tame inflation by making imports cheaper, as the Greenback is widely used as a currency to facilitate trade. On the other hand, however, a strong Singapore Dollar will make our exports less competitive and more expensive for end-users in overseas markets.
Why Is Inflation So Domineering?
I have stated time and again that inflation is good only when an economy is in recession and trying to get out of it. When there is growth, there is inflation, hence this is good for the US especially when the US government is trying to engineer growth so as to a spur employment.
The US economy has yet to be faced with inflationary pressure although the higher cost of energy has caused consumer prices to increase while Ben Bernanke, in his statement, has commented that inflation is still not a problem adding that energy and commodity prices are likely to come down in the second-half of this year.
So, an economy with little or no inflation has pushed its stock market (Dow Jones Industrial Average – DJIA) up by 8.7% since the start of this year while one that faces serious inflationary threat is flat for the year. The SSE closed at 2,808 points on 31 December 2010 and closed at 2,872 points on 18 May.
The other Asian markets like Japan, Hong Kong and Singapore are all in negative territory for this year, signaling investors’ fear that inflation, which would ultimately result in higher interest rates, would drag down growth and, eventually, the economy.
Of the three blocs: US, European Union and Asia emerging economies, the US has yet to step into inflation territory while Europe has started to feel the strains of inflation. At the highest end of the inflation “hierarchy”, Asia and other emerging economies have already felt the strains beginning from late last year hence explaining why the stock markets have underperformed the mature markets in Europe and US.
When inflation becomes a problem, interest rate will rise and cost of living and doing business will also escalate. With so much “cheap money” in the financial system as a result of the US government’s policy, funds are constantly on the lookout for places to park their money hence Asia, with its high growth rate since 2010, have benefited from this trend.
At the end of 2010 when inflation became a problem for Asia, especially China, fund started to flow out and began to park their money in the financial markets of Europe and US where growth was coming back and inflation not yet a problem.
Should the US change its policy and start to hike interest rate or even put an end to further stimulus measures, it would drain money away from the financial system and spark off a round of selling.
Slowing Growth Or Temporary Blip?
China continues to grow but some segments of the economy are showing signs of slowing down. There have been conflicting signals from its economy but the main theme that occupies the minds of policymakers continues to be that of inflation.
Inflation in April at 5.3% was slightly off the 5.4% in March but this figure is still way off the official target of 4% for the full year. The economy still grew at 9.7% in the first quarter, which also means that it is still growing at a much faster rate than the 7% that Premier Wen has targeted.
With China’s economy still looking strong and inflation seemingly untamable, China looks set to proceed with its policy of gradually hiking rates, putting a cap on certain strategic items and raising banks’ reserve requirement.
China’s economy and stock market is faced with a dilemma: too strong a growth will invite more measures to cool the economy while slower growth will probably spark off fears that demand from China will slow and this will in turn drag down the entire global economy.
In the Europe and US, there are already signs and worries that the economic growth is tapering off, which has made the situation even more precarious now that worries about the PIIGS have resurfaced. Coincidentally, the slower economic growth is coupled with talks from the Obama Administration of lifting the debt ceiling so that the US government can borrow even more money to give the economy another boost in preparing for next year’s presidential election.
After a year of solid performance, both in the economy and the stock market, are we in for a “correction” on both fronts?
Much lies in China’s ability to tame inflation as well as the US government’s ability to persuade Congress in raising the debt ceiling. Until all these issues are addressed, the stock market is unlikely to rally or correct in a big way.
We can only wait for more signals and news from the China and US economies before deciding what to do. Inflation for China is still the key while a weakening US economy would be the last thing we want to hear.
Source/转贴/Extract/: www.sharesinv.com/
Publish date:20/05/11
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