The market activity will, as usual, be lower after the weekend until New Year but during the last days of this decade we have the chance to enjoy a few important numbers.

Here is what I am looking for the coming days:
From Japan, before 28th Dec the Dec business
conditions for small businesses is released. It’s almost a preliminary number, that alone makes it interesting though the survey itself is also worth to notice. Last month it was 43,0. Please note that the big business worsened in the period October to December due to MOF. Downside risk for Japan.

On Monday from Japan the Nov preliminary industrial production and the retail sales is published, interesting numbers from the second largest economy in the world.

In my view US offers one really important number the coming week. On Tuesday, the Dec consumer confidence will give us a hint about the very much watched US consumers. The average of economists go for 52,8, up from 49,5 last month. Most likely, but a higher number than 53,0 is needed to boost stock markets further.

Towards end of the week (maybe Saturday included) 2 UK organizations announces the house price developments in Dec. Nationwide first and then Halifax, a small increase in December is expected.

One could almost feel tempted to say, that China never sleeps so they announce the interesting NBS Manufacturing PMI 1st January, 55,2 last month with an increase expected again.

As mentioned will next week only offer low activity but stocks will follow the fundamental data (better than expected = rising markets and vice versa).

The currency market will be dominated by “end of year” adjustments without any clear trend. Next year the Dollar will move lower anyway.

Peter

To be honest, the China piece required the deepest thinking, so you get some extra. When a stock market drops 20% within 2½ weeks, and furthermore in an economy that lives on a public boost and excess liquidity the thinking needs to be accurate. The drop was over a period long enough to be traded, and not just a couple of days with panic. This makes the set-back more remarkable.

The boost and the bubble

The equity market got a boost from the very famous anti recession package. It’s ok that this supported the stock market, but the bubble like rise since March is caused by the sharp lending increase from all banks to the corporate and private sector. I have earlier mentioned that 20% of the lending went into the stock market on the mainland and in Hong Kong.

It is now widespread knowledge and seen as a fact, also understood by China’s State Council. There have been official comments indicating that this will have an end and all banks have suddenly announced a pull back in lending for the rest of this year. No surprise that the market gets more nervous when this cash generator disappears.

Fundamentally it just means less inflow of risk capital in the second half of this year. What we all are watching is if the speculative capital from the spring will move out of the market again. There are no signs yet, but it makes the moves more choppy.

Commercial properties will get a boost

Since end of last year bankruptcies among Chinese real estate developers have been expected. Most have actually survived after they sold out at fire sale prices. After a panic sale or forced sale markets normally sees the lows as a bottom and is ready to buy at higher levels. In addition the general rebound in China naturally also comforts the commercial property market.

There are clear signs of higher risk appetite towards commercial real estate in Hong Kong and China mainland.

On 29^th July Hong Kong Stock exchange had the fist property developer IPO in a year, the company BBMG Corporation. The issue was oversubscribed by a stunning 235 times at HK$ 6,38 – the first trading price was HK$ 10,20. It belongs to the story that BBMG is not a 100% property developer as they run different production brands as well. Never the less it has supported the sector in general pushing P/E above 10 again and signals more investor appetite for commercial property. The next large IPO is likely to be Evergrande in October and more will follow.

The Chinese government is doing everything possible to fuel the boost. Chinese insurance companies are hungering for investment alternatives as they are limited to a few asset classes like stocks and a small bond market. Early 2009 the Chinese insurance law was revised to include fixed investments like properties. Before a total of only 20 billion Yuan was allowed to be invested in properties. After the new rules get introduced the amount could exceed 300 billion Yuan.

The latest unconfirmed news from end of August are that fund houses and brokerages should be allowed to offer exchange traded real estate investment trusts (REITs). This needs to be confirmed by the China Securities Regulatory Commission.

Yes, it smells of a boost and fast profits, and make my alarm bells ringing. This is an opportunity that needs to be explored, but the investor needs to be very careful.

I can find a number of people who claims that commercial properties already are priced too high. That alone is a risk, but one thing is sure, a lot of unfinished projects and properties without occupation will be sold in different packages.

My conclusion is that it should be explored but the quality is very essential. If it is unsatisfactory, then stay away as the bubble will clear the air one day again..

Production overcapacity is a problem

The Chinese industrial production looks fine and is developing better than the numbers from the old economies. There has been a real turnaround from the slump last year.

That the growth rate never went down in negative territory partly justify the rebound in equities since last autumn. So what is the problem ?

The leaders of the Communist Party have a very good micro and macro economic understanding. The problem is further down in the hierarchy as the main part of enterprises is state owned. The management of corporations across China is heavily influenced by the Communist Party heads of the local provinces. Some of these heads and the corporate managers do not always take economic sinful investment decisions, but compete with the neighbour about being the biggest. The result is overcapacity, apparently so big that China’s State Council chaired by Premier Wen Jiabao intervenes.

Overcapacity in the steel business I mentioned for some weeks ago issue but now is cement, plate glass, coal chemical and wind power equipment added to the list. High-tech and service sectors are said to receive more support.

This is very interesting information as it means a lot for stock pricing in the different sectors. The way to curb sectors with overcapacity is to sharpen the conditions for new approvals but also to tighten credit for the existing business.

I expect the mentioned sectors to underperform compared to other stocks, but it also tells us, that the overcapacity is serious. The wind power sector is worth to notice, where investors throughout the world are upbeat on the sector, does China report about overcapacity.

1st half year results comfort investors

During the last week of August the 1^st half year results from several leading listed companies ticked in. Good and bad, but in general good enough to comfort local investors.

As the only airline company in the world Air China surprised on the upside due to growing demand. China Life and China’s top homebuilder released positive news as well. Below the blue chip size a range of good results was posted as well.

Car producers surprised on the downside where DONGFENG Motor Group didn’t deliver the expected income growth and SAIC Motor was weak as well, a bit surprising and should be noted.

Like in other stock indices are the banks quite heavy. The half year results are ok, but more difficult to judge due to the enormous lending growth. I am not so impressed of the banking results.

During the 20% drop in August foreign investors left the stock market but locals, and in particular private investors, bought around the bottom. It signals local comfort, though from private investors and not from the large accounts with borrowed funds behind.

Regarding the A stock index is the 3050 important, where a close above will be seen as good support. Very important is 2900 as it is watched by all participants in the market.

The August drop was steep but basically just down to more sustainable levels with a domestic average P/E value at 25 instead of 30 at the high. Some sectors are under growth pressure and the speculative money is a risk we need to watch.

The Chinese stock story suddenly has turned somewhat more complicated and I have earlier warned about uncomfortable high levels. Despite the downside risks have increased I can not recommend to leave China stocks yet, but I follow it very closely.

What should the investor use of Hu’s speech ?
Like any other country with a stimulus plan the aim is to maximise the domestic growth outcome and not to save or help other countries. China just has one strategic advantage compared to many other countries. The fixed asset investments are true investments with a future pay-off because China develops rural areas where new growth will arise, and not just repairing existing infrastructure as western developed countries can do. This way China builds new infrastructure in areas with lower labour costs than in the coastal areas where almost the whole export production is placed today. Another problem that is partly solved is the unemployment among domestic emigrant workers. 20 million out of 120 million lost their jobs within the last 12 – 18 months. Some of them find jobs in all the infrastructure projects.
We have already seen the effect on some commodities like base metals that has gone up. I think the demand will consist for some time, so mining stocks are still worth to consider, and the related bulk shipping companies will be supported as well. But please don’t expect the whole world to be saved by the Chinese stimulus, and some of the commodity purchase is pure speculation as mentioned in the last update. Just companies outside China with well organised export to the very specific sectors that are supported by the stimulus package will benefit. These are Japanese building companies and producers of machinery plus some German, and then the Chinese mainland and Hong Kong based companies of course.
President Hu gave a few more hints. The Communist Party wants to continue the boost of grain production and increase farmers’ income. This is interesting as the agricultural sector is big and we are talking about new demand. Chinese companies producing equipment for the agricultural sector with a B listed stock are long term investments. Producers of products like fertiliser with listed B stocks are difficult to find. I would look for non-Chinese companies with production in China or serious export to China. If the peasant’s household income jumps, then their demand for durable goods increases. Several producers of household goods and retailers with decent results have listed B stocks to invest in.
The stock market
Like in any other country with cheap and excess liquidity some of the funds find their way into the stock market. It is also the case in China (mainland and Hong Kong) but no official number will ever be released on this subject. Go for 20 % of the more than 7 trillion Yuan of credit growth during the first 6 months, that is a decent guess.
It’s hard to argue that the Chinese stock market is overvalued as it is still only trading at 50 % from the peak, but you probably feel my scepticism about the speed of the turnaround. There are too many signs of leverage instead of real earnings behind the rise since November last year. I admit to have been too slow to advice about coming back into the market. The first 33 % of the expected investment in Chinese stocks I recommended to buy at a break of 180 in Shanghai B, the second 33 % trance must happen when 225 breaks. To be honest, I don’t feel comfortable about it, but if the market goes up you need to be in it. Just keep an eye on all the risks factors, they are growing and not getting smaller.

I have spend some time researching the rising Chinese commodity import as it has been discussed during the last 2 months. Naturally very interesting in respect of the commodity prices, but the conclusions affect all asset classes in China, including equities.
Many have heard that imports of physical commodities are so huge that they can’t be transported away from the ports. Some of the stories are true, but as always regarding China, we will never find the final answer. Based on different information sources, then around 1/3 of all commodities imported to China are bought and kept for speculative reasons.
The speculative commodity buying continues.

The higher demand for commodities is partly explained by the spending on infrastructure and urban development. But it almost seems evident that Chinese corporations have bought, and are buying commodities, for speculative purposes as well. It most likely started because the forward prices were much higher than the spot price by end of Q1 (the likely reason was rising investments in commodity ETF’s by private individuals). One could argue, well done, because the companies simply used the steepness of the commodity forward curve. So the companies bought spot and sold forward. The curve flattened, meaning the speculation gave money. But why continue to buy commodities? The answer is, as a pure speculation in higher prices.
Corporations around the world suffer from much tighter credit conditions, so how can Chinese companies generate liquidity enough to be long and warehouse physical commodities? Simply by bank financing, as Chinese banks actually finance physical commodity positions against the same commodities as collateral.
In respect of lending and credit markets, is the difference between the old economies and China how the lending is allocated. The old economies suffer from the same Japanese problems like in the 1990’s, where the banks could access unlimited liquidity at de facto zero interest. In China the Communist Party every year decides how large the lending increase should be, and then the banks have to deliver the lending growth. For the whole 2009 RMB 5 billion was planed, but the end-of-June figures show that so far in 2009 the lending already reached RMB 7 billion.
Be aware of the new asset bubble.

Partly the credit expansion has benefitted different areas, but now we circle back to the commodity syndrome. Since January, everybody has reported about the corporate SME segment suffering from credit constrains, against large and state owned enterprises getting overloaded with credit supply. Corporations are now participating in the grey credit market as active lenders, apparently at pretty high interest rates.
The worst is, that these hot and cheap credit money have found their way from bank lending to corporations and further into the stock market in China mainland and Hong Kong (the Hang Seng move from 15.000 to 19.000 in April and May). This is risky business and should under normal circumstances lead to a collapse, or minimum a very dramatic sell off in equity markets.
The people in the Communist Party are fully aware of what is happening, and I think that they are willing to run the risk of a new asset bubble in the name of creating a wealth feeling.
Despite of the bull market for Chinese stocks I argue for a 10 % correction in Chinese stocks due to the above reasons, and then a new evaluation is needed.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

I apologise for not having updated with comments the last 3 weeks but I had 1½ weeks holiday on 2 very nice hotel. Very unfortunate did the wifi not work. Then Easter arrivved……

The 4 entries from today are:

Currency markets – Back in the risk aversion / appetite game again

Equities – A new recovery shape has been invented – the W shape recovery.

China – The Ox is strong

Central bank rates – What can they do? Print more money…..

China – The Ox is strong

Hang Seng (15.670)  Shanghai B (168,00)  USD/CNY (6,8320)

For the next 12 months we won’t see the lows from last autumn and I need to revise my thinking about Chinese stocks.

I have always argued that the turnaround should come in China and other countries in that area. But I admit that I didn’t expect the turnaround to happen so fast and I will claim that it is not sustainable. The counter reaction might come next year.

No doubt that domestic China has seen some improvement. The number of passengers on domestic Chinese flights lately have shown y/y growth rates of more than 10%. Different consumer segments also have shown good signs. But in reality are we talking about small indications.

The rest for sure is partly influenced by the government. The government officials talk the market up. The car sales numbers are helped by government buying of new cars that should have been bought later in the year. Rumours that the slightly positive housing market sales partly is caused by state run banks that are forced to increase their lending (fake mortgages might be in the game…..).

The Q1 GDP numbers that will be released Thursday are long awaited. The expectations have been around +6,3% within a range of 6% – 6,8%. Based on comments Wednesday the number will be around 6,0% in the very low end of expectations. The market will look at the q/q development and I think it could give a positive impulse to the stock market Thursday. What is very important to note, is that whatever the number will be, then it is inflated – it should have been lower……The government have done everything to keep the growth running. State owned companies have been persuaded not to fire people, companies are importing raw materials with the sincere hope they will be used later etc.

If the Communist Party finds it necessary with an additional stimulus package, I take it as a clear sign that the situation is worse than expected. It seems likely that the package is under way.

Earlier this week Financial Times had a very interesting article about the Chinese housing market. Mr. Cao Jianhai, professor at a leading government think tank, argued that property prices will drop another 50% during the next 2 years.

All these alarming signals are not having any impact on the market right now, but fit well into the W shape recovery.

While I consider the strategy about Chinese stocks I remove the targets.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 5 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 5 entries from today are:

Currency markets – Finally reacting on different factors

Equities – Another bull go, backed by the US tax payer – PPIP it’s called this time….

China – Reorganizing the car industry

Hot Topic – EUR/USD – Did Fed start a new EUR/USD trend ?

Central bank rates – They did, quantitative easing from Fed…….

China – Reorganizing the car industry

Hang Seng (13.447)  Shanghai B (152,00)  USD/CNY (6,8330)

This week the market will chew on the old data once more and focus on different rumours about old or coming numbers.

The domestic sentiment is still positive and will trade higher. Hang Seng is very bid due to the large component of real estate and banks, so up as well, following the world.

A currently battled sector might be worth to have a look at.

If you believe that car producers will belong in the future equity portfolio (it will in mine portfolio), then the Chinese government has decided how the Chinese controlled car industry will be shaped in the future. The interesting plan was published 20th March.

According to a State Council statement it plans to reduce the number of automakers before end 2011. The spilt will be to two or three groups with an annual production volume and sales of 2 million vehicles each. The next level is expected to be four or five companies at 1 million each. Today 14 carmakers produces 90% of the domestic sales, the number of companies is planned to be 10 in 2011.

The 4 surviving major groups are indentified:

FAW

Dongfeng Motor Corp

Shanghai Automotive Industry Corp.

Chang’an Auto

These companies have been encouraged to pursue mergers and acquisitions. How and in what direction, the statement didn’t mention.

A bit interesting about SAIC, China’s largest automaker by sales, as this group is thought to be in the second wave of mergers. The company merged with Nanjing Auto in 2007.

Please note that the above information is not a trade recommendation, but is seen as important information when building the equity portfolio…..

Maybe a word about the February Chinese auto that jumped 25% y/y. No doubt that the reduction in taxes on cars with small engines had an effect but the February 2007 number was very low due to Lunar New Year. The rumours also say that the government and public departments bought many cars in February, though unconfirmed as usual.

I keep the target, but know that I am under pressure like with the rest of my views..

Targets: Hang Seng 11.000     Shanghai B 110

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Feels like waiting for the next hurricane.

Equities – The bulls are having a party

China – Still joining the bull party

Central bank rates – One cut more from ECB in April and we are there.

China – Still joining the bull party

Hang Seng (13.031)  Shanghai B (144,00)  USD/CNY (6,8340)

The economic numbers from China are mixed. Domestic car sales went up but import and export dropped further in February. What is more mixed are the different economists views on the economic data.  It seems that each economist uses the arguments that fits to the personal view, and these are in all directions. It also shows how devoted the market is.

We will need more data to get a clear idea about the next move in domestic equities. The global positive sentiment should spill over on the Chinese stock market during the week keeping the bulls happy.

Some interesting information always come out. Friday, People’s Bank of China and also China’s Premier Wen Jiabao gave some comments. They show a very interesting concern about the future value of China’s US bond holding, both in respect of the real value, the US fiscal discipline but also concerning the Dollar. Again they gave the warning about deflation (it must on top of their minds so often it’s said), but the official China apparently also has an opinion about gold – they think it raise towards the all time high again.

The credit market in China is under clear observance after the significant numbers in January and February. I argue, that a major part has been allocated to relative safe lending like the big government supported public projects and the smaller companies have difficulties getting funding. Several well known loan guarantee companies are in difficulties. The companies have been involved in different financing of the small and medium sized companies (SME). The finance companies are de facto providing SME’s with working capital but the source is drying out. At the same time is the grey lending market under pressure as mentioned in prior comments (after all the grey market counts for around 25% of the total Chinese credit market).

It has two effects, run on official bank lending but also squeezing the liquidity for the SME’s that can’t access bank lending. The official credit growth is not as big as expected but is more moved around in the Chinese box system.

As usual, I remain skeptical about the current positive sentiment and keep the targets.

Targets: Hang Seng 11.000     Shanghai B 110

Below you will find my weekly view on the very challenging financial markets.

The week has been extremly busy and then I caused some technical problems – all in all it gave some days delay with I apologise for. Probably also causing some text problems this week, not always so easy J

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

China – Expectations beats reality

Hang Seng (11.931) Shanghai B (140,00) USD/CNY (6,8350)

Last week the yearly National People’s Congress (NPC) took place. Broadly covered by many news

agencies, but I of course highlight what I think is interesting for the market. Primarily the comments made in

connection with the NPC.

To be very honest, the congress didn’t bring much new apart from macro economic pep talk. That the

Communist Party didn’t had much new to offer probably was the biggest surprise for many domestic

investors.

Just one thing should be noted. The Director for the National Development and Reform Commission Mr.

Zhang Ping announced that the large 4 trillion Yuan stimulus package will be adjusted. Infrastructure

investments will be cut by 300 billion Yuan. Technology projects get an additional 210 billion Yuan, the

rural area public work projects receive 120 billion Yuan more and social welfare programs another 110

billion Yuan.

The biggest market happening was the apparent comment from Li Deshui, the former statistics bureau chief,

that moved the market last Wednesday. He was quoted for talking about a new stimulus package so the

global stock market went straight up. Li Deshui later said he was misquoted.

The leaders of the Communist Party have for some time referred to the lending growth in January. In

connection with the congress it was mentioned that new loans in February are expected to be between 800

billion to 1 trillion Yuan compared to 1,6 trillion Yuan in January. Clearly a lower growth and almost half of

the planned 5 trillion Yuan loan growth has already been utilized.

Well timed some leaders from the industry again argue for an Yuan depreciation and the Chinese Premier

Wen Jiabao talked about promoting export (using more rebates?). It will please the new G20 friends.

Based on the unofficial part of the news world, the economic reality looks less bright for China. Last week I

mentioned if Wen is worried, and I think he is. The real unemployment rate is much higher than the official

one, he admits that deflation is a threat and the trade balance figures for February will be disappointing. Talk

about that export and import has dropped with more than 20% last month.

The Communist Party is talking as like the downturn bottomed out in Q4 last year, and it could be, I admit.

The market seems very devoted about this (investors and economists). No news that I belong to the skeptical

group, as I don’t believe it’s possible with such a fast turnaround when the world is deteriorating.

During the week we will learn more when, in particular, the trade figures are released.

I keep the targets.

Targets: Hang Seng 11.000 Shanghai B 110

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

China – Wen thinks its ok, or does he?

Hang Seng (13.437)  Shanghai B (148,50)  USD/CNY (6,8340)

Chinese stocks went lower last week. I say it makes sense because equities only went up each time a new part of the stimulus plan was released. The bulls will say that the China mainland economy has seen the worst, and therefore one of course needs to be long China mainland stocks. To be honest it’s not an easy call, but you know my standing. I see the recovery in the stock market as premature and too early, but there is a lot of information to elaborate.

During this weekend the Chinese Premier Wen Jiabao was on the first ever on-line chat with the public. His comments have been covered by several media reports but the headlines are like this. He speaks openly about the unemployment among migrant workers, and the problems finding jobs for the college graduates finishing their studies this year i.e. it must be a problem they can’t hide anymore. He also mentions that the global crisis is spreading, also within China, where he sees the export dependent eastern part of China as most hit. He talked about a long crisis.

On the upside he said that the government was willing to support more if needed. He referred to the increased consumption and bank lending in January as a sign that the stimulus packages have started to help. Furthermore he noted that the power generation and consumption is higher this February compared to 2008. It’s a number the Chinese government focuses a lot at, but could there be a Lunar New Year effect?   

Due to one report Wen also said that he is worried about the stock market. Not in what direction, but on the downside I suppose. In my view it’s a signal that the government will support if it drops too low.

Why this openness one could ask? It could be another small step towards more openness in general, or it can be because the problems from the economic downturn are so big that the Communist Party needs to communicate with the public about it. It’s China so you never know, but I am a bit to the last one.

Announced initiatives, but somehow less public, that are worth to keep an eye on. Ten industrial sectors have so far received help in different ways. The next on the agenda is the logistic sector, where the government will try to encourage more growth but also reorganize the industry into bigger players. The government will also allocate more investments in the non-ferrous metals industry. It will partly be done through direct investments in companies, but also by setting up a national reserve system for non-ferrous metals. A last point that will please G20, is to increase the export rebate……

From the unofficial information channels comes the most alarming news as usual. It’s about the commercial property market. Hong Kong is easier to evaluate because some companies are listed. Some property companies in China mainland are also listed, but there the financial information from the companies might not have the same quality as we are used to outside China. The empty office space in large metropolitan areas is simply just growing. At the same time are very large developers and projects coming very much closer to the credit renewal season – probably within the next 12 months. We are talking about very big financing needs and partly are western money involved. Lower rental income than planned for the projects and with the western pockets empty it will be a tough task…….Despite that property prices has come down in China, one still needs to sit on the hands to wait and see what happens.

I keep the targets.

Targets: Hang Seng 11.000     Shanghai B 110

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Event risks are rising

Equities – It feels heavy……

China – So far the Ox turned out to be a bull.

Central bank rates – The next in line is ECB

China – So far the Ox turned out to be a bull.

Hang Seng (13.437)  Shanghai B (148,50)  USD/CNY (6,8340)

Chinese mainland stock markets continues up with domestic investors (A indices) as the key driver. No doubt that a part of the force is the fact that investors only can invest in real estate, stocks and place money on deposit.

Very understandable that stocks looks as the preferred alternative as long as the stimulus packages are rolled out. An example from last week was the ship builders that got a national protection, sending shares significant up within the same day. The usual question is, if this is sustainable?

It continues to be a matter of faith, where I continue to be skeptical. The reaction on economic data (particularly the Jan trade data) last week proves this situation. The absolute numbers were down, partly due to the Lunar New Year taking place in January instead of normally in February. Some economic models suggest an adjusted rise in exports, but does this day count game make sense when we know, for sure, that there is spare production capacity? If production had been running at its maximum, then holidays would have lead to a drop in output. Everybody knows when the Lunar New Year is, so with spare production capacity producers easily could have increased production in early January to meet demand during the month. The conclusions from different analysts depend on what direction they in general argue for.

The January credit growth data that I wrote about last week, continues to surprise. Even higher than first announced, so my reservation towards the cheerful analyst might be wrong. But very interesting has the Chinese central bank asked to get more details about how the commercial bank lending is allocated. PBoC has also heard the rumours about the lending not going to the sectors that are desired.

Over the weekend a couple of interesting things came up. According to a newspaper article, the company DDMA Market Research & Consulting released a survey showing that 60% of consumers in 5 big Chinese cities have reduced or plans to reduce spending. Unfortunately, the survey didn’t give the respondents the possibility to tick off “increased spending” just “not reduce spending” as the most expansive. Though the conclusion should be, that consumption risks entering the contractive zone – very much against expectations in the stock market.

A very important comment from Yi Gang, Vice Governor of the People’s Bank of China, where he in a speech Saturday hinted another possible interest rate cut. He also said that “China’s main task in the short term will be to fight against deflation”. Two immediate thoughts when I saw that one was, that if this is the case for China it could easily be the same for the rest of the world. Secondly, deflation is poison for assets…….

Last, a more Hong Kong and Hang Seng related comment from Hong Kong’s finance chief, Financial Secretary John Tsang who also spoke Saturday. He said that Hong Kong probably had negative growth in Q4 2008 and that the economy will deteriorate further in 2009. Very realistic he also said, that he was not sure when the global financial downturn will come to an end. Unemployment will continue to rise, particularly when college students graduate around mid 2009. He thinks this will be the peak.

I remain a bear in general and therefore cautious even regarding China and keep the targets.   

Targets: Hang Seng 11.000     Shanghai B 110

China – China mainland is going from upbeat to real bid……

Hang Seng (13.769)  Shanghai B (141,00)  USD/CNY (6,8325)

Shanghai B is up from 126,50 to 141,00 on the week (11,5%) and up more than 50% since November last year.

This is serious for a bear like myself. It would not be trustworthy just to keep a target on the downside without reacting on the developments. I remain skeptical but raise the target from 90 to 110 for Shanghai B.

The current development is very tricky as we have the Communist Party using all possible methods to create a turnaround feeling, hungry Chinese investors buying A shares sending B shares higher as well, foreign investors jumping on the B wagon. All partly based on some official data combined with rumours, where the last part paints a worrisome picture.

As mentioned last week, we are playing on the same hand as Chinese government if we buy Chinese mainland stocks because the government influence the economy so strongly. So I will try to highlight the supportive measurements that are initiated but also what developments we should worry about.

The current growth incentives that the government is taking are CNY 130 billion investments primarily in rural areas (this is a batch of the CNY 4 trillion package, I can provide you with the details if any interest). Additional support have been given to the following sectors, machinery builders, textile (though less increase in export rebate than expected), automotives and future measures are soon to be announced for electronics and the real estate sector.

The banking sector is expanding after lending restrictions were lifted. This must give stimulus impulses, certainly in the stock market.

Now, many are very happy about the expansion in banking lending as it signals new growth. Can we trust the figures? Yes. What do they show? We don’t know……..This what some say. In reality is bank lending not expanding at all. 25% of the increased lending in January was provided by one bank to power grid, railway, road and hydroelectric power projects plus a large portion to discounted bills to small and medium companies.

The project finance is apparently hunted by all Chinese banks due to the stable returns (and very smart with the Chinese government supporting these projects). The discounted bill business is fine, but it is basically just providing working capital to existing business in a corporate world where liquidity seems to bee tighter.

Some sources claim that under the lending restrictions during 2007 and 2008 bank lending was taken off the balance, and this lending is simply coming back on the balance sheet again. And last to the unofficial lending market. A couple of times I have mentioned that hot money are leaving China, which corresponds well with less activity in the unofficial credit market (25% -33% of the total market).

Wenzhou is the capital of informal banking in China. Very funny can some analysts out People’s bank of China branch data from Wenzhou see that the unofficial lending is shrinking.

The conclusion is that lending is not growing as the figures suggest, maybe not at all. It correspond well with the PMI numbers for January that went up from 41,2 in December to 45,3. Is was widely celebrated as a turnaround but it is contractive as long as it stays below 50,0 (the employment component actually was lower).

Of the companies listed on Shenzhen Stock Exchange that so far reported the result for last year, 20% suffered losses, which for many companies was the first time. Among the profitable firms around half experienced a deteriorating profit.

That happens these days, but where there is a concerning Chinese twist is regarding lay off’s. Companies in China are now urged to maintain jobs. This is mainly a subject for government owned companies but also spilling over to private owned companies.

I respect that if enough investors believe that the market will go up, then it goes up. It can be that the Chinese government can change the development, but the stakes have grown very large pretty fast. Not only regarding the stimulus package, but also the “official intervention” towards private companies in attempts to avoid social unrests and further economic downturn.

I still go for a downwards correction in equities, but respect that the chips on table now is a high rolling game. One day the China turnaround is reality, but I fear that people betting on fast recovery are cashing in before we have seen all hands.

The Hang Seng target is unchanged.

Targets: Hang Seng 11.000     Shanghai B 110

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – A bagful of mixed sweets this week.

Equities – Which late night show are you watching ?

China – So far China mainland is upbeat.

Central bank rates – Another cut to save the world this week……

China – So far China mainland is upbeat.

Hang Seng (12.861)  Shanghai B (126,50)  USD/CNY (6,8475)

China mainland stocks continued up on the first on the first trading day after the Chinese Lunar New Year celebrations.

I have long argued that Chinese shares will be among the first to rebound when its time to go long again, but is it time now ?

Chinese mainland stocks have shown some strength since the low last year, but as always, are stock investors playing on the same hand as the Chinese government. The current positive sentiment is mainly due to trust in increased government support rather than healthy growth. This makes the position as investor more difficult and life after the stimulus packages even more unclear. It’s also the reason why I believe in a new dive for mainland equities.

Today’s rise in the agricultural sector was on the back of Beijing’s efforts to support farmers, the same for the textile industry (Sunday, the Chinese government issued guidelines for agricultural development this year – I can provide you with more information if needed). For some time ago it was different sectors within machinery and other manufacturing sectors. Banks are getting told to boost credit growth to private households, with lower loan quality as a consequence i.e. losses will rise over years to come.

In earlier comments I have mentioned stocks in or linked to the agricultural sector as interesting but due to the fundamental changes for pheasant farmers. The above developments include a big risk for a set back if the state is involved too much.

Another very important message Sunday was in the Financial Times interview with the Chinese Premier Wen Jiabao. He is already now talking about a second economic rescue package even before the one announced last year is implemented. Short term equity markets like such news but it also shows how severe the situation is.

With interest for the US Treasury he also mentions China’s appetite for US Treasuries. One quote I find worth to note is “Whether we will buy more US Treasury bonds, and if so by how much, we should take that decision in accordance with China’s own need and also our aim to keep the security of our foreign reserves and the value of them”.

There can be many reasons why he says exactly so, but nowhere it’s just a one way street anymore. 

That was about the fundamental thoughts. Here is a short update on some indications from the last 24 hours. The CLSA manufacturing PMI in January increased to 42,2 from 41,2 last month. It’s still a low level, but export showed the biggest rise.

The Shanghai housing market showed a month on month drop of 43,53% in January a statistic from Shanghai Uwin Real Estate Information Services Co showed. It seems as a large drop, but it happens every year due to the Chinese New Year. This year the decrease was lower than other year, but the supply of new homes is falling very fast which is a sign of slowing activity.

The first numbers from Shanghai regarding consumption during the Lunar New Year week has been released. The number of tourists went up with 4,39% to 2,49 Mio but the turnover in hotels only went up with 1,6% to approximately 2 billion Yuan, though not adjusted for inflation.

The Shanghai numbers do not have any statistical value but it still underline the global picture of consumption – it is dropping in real terms.

Other funny numbers from the week in Shanghai where, 21 million passengers were transported by taxis, 12 million people used the 8 Metro lines, 30.000 staff worked during the week to collect garbage and the number of consumer complaints dropped with 9% to 425 cases.

As of national Chinese numbers this week offers one, but important, on Wednesday. The NBS PMI for January, that many would expect to point upwards after the higher manufacturing index today.

I keep the targets as they are.

Targets: Hang Seng 11.000     Shanghai B 90

China – The Ox has arrived…….

Hang Seng (12.579)  Shanghai B (124)  USD/CNY (6,84)

Again very interesting with China mainland ending last week higher and Hang Seng dropping further. Hang Seng is a fair picture of the global movements. The domestic investors might have bought stocks at the Chinese year end with the expectation that the year of the Ox will be better than the year of the Rat.

With the Chinese Lunar New Year celebrations going on for some days, the financial markets will be closed. The days are normally good for retail sales, though it should be priced in the market.

Some statistical data from last week is worth to use in the big picture.

The sales of condominiums to private individuals went significant up in December compared to November. One company reported a jump of 57% in sold living space month-on-month, but for the same company the total sales in 2008 were down 9%. Other development companies reported even higher increase in their December sales numbers.

The rise in sales has a reason – mainly rebates. It seems to be around 7 – 10% on the price but some developers have paid for the interior construction and maybe even delivered a car together with the condo as well.

Data from the National Development and Reform Commission showed that property prices fell with an average of 0,5% from November to December in the 70 main cities of China. Most negative for new buildings in Shenzen (-18,1%) and Guangzhou (-9,4%), both numbers are yearly changes. It’s unclear if these numbers include all types of real estate.

The jump in private households buying condos in December might explain some of the credit growth in December, which is a healthy component in the credit growth. Overall are the news not encouraging – if prices on property continues down, then we all know it is a true headwind for the government that hopes on a domestic demand boost.

The GDP numbers released Thursday last week confirmed a slower growth which isn’t a surprise. Due to the way data is collected and presented by the National Bureau of Statistics the discussion is about if we get the full picture.

Apparently a government economist said before the release of the GDP figures, that the actual number should be below 6,0% but would be reported as above (that part was right as it was 6,8% growth). Some economists also think that the first part with below 6,0% is right. This view is supported by much lower factory output, power generation and activity indices that all in all suggest an even lower GDP number.

I keep the targets for the Chinese stock markets. Hang Seng is moving in the right direction but China mainland stocks are holding well, which I observe closely.

The year of the Ox will be very difficult with a lot of state support already priced in the market. The Ox symbolizes patience, hard work and tenacity – quite a good picture of what is needed……..

Targets: Hang Seng 11.000     Shanghai B 90

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Capital flows are gaining in importance again……

Equities – Is the earning season also a hurricane season ?

China – the credit growth in December a true credit growth ?

Central bank rates – Still pointing lower……….

China – Was the credit growth in December a true credit growth ?

Hang Seng (13.256)  Shanghai B (121)  USD/CNY (6,83)

Hang Seng lost a couple of percent last week which was fine compared to the swings in global equity markets. More remarkable are the China mainland stocks where A shares are underlying supported (actually A shares are up 7,34% this year so far) and Shanghai B ended the week unchanged.

Friday Chinese stocks went up due to speculation about state support to the shipbuilding and machinery manufacturing sectors. It happens after tax cuts and other support initiatives for the automobile industry were announced earlier last week.

It shows that the current sentiment for China mainland stocks is positive and investors have appetite for China stocks. Despite my targets of lower stock indices, I have deep respect for this situation. The market is always right, but is it a short term reaction?

I think, yes it is. The Chinese economy is still heavily dependent on export (please read last weeks comments about delay in the rescue package and new budget deficits), plus despite some economic muscles, the Chinese state can’t bail the whole country out. It worries me when stocks markets go up on increased economic aid from the state.

Last Friday the People’s Bank of China came with a statement where the central bank governor Zhou Xiaochuan of curse said that they are focused on delivering stable and quite fast economic growth – this he needs to say. Zhou also said, that “China’s economy faces a harsher and more complex environment as the global economic crisis deepens in severity” – this comment would only come if it was truly needed…..

It leads me back to the Chinese December credit growth number that was taken as a relief, and even a possible turnaround in the market (certainly supported the positive bias in the stock market).

Detailed information about Chinese economic numbers is for different reasons difficult to become. It’s the same about the credit numbers, so it takes time before rumours and indirect calculations maybe crates a picture.

From what I hear, I note the following observations as important:

-          Most of the growth came from an increase in bill discounting, that include a risk of double counting. Some rumours say that companies are taking more short term funding, but not for investment purposes, apparently more because of serious cash flow problems. If these 2 things are connected, I don’t know but the latter rumour is simply very bad if it is correct.

-          The “hot money” are moving again. Until recently hot money went into China mainland through different channels. With dropping Chinese interest rates and it also is obvious that the CNY won’t appreciate within near term the “hot money” now moves out of China. I haven’t heard any numbers, but money is on the move and it leads to the below point.

-          Estimates say that 25 – 30% of the total lending in China mainland is informal. With “hot money” flows out of China one could imagine that this part of the lending system has less capital to circulate, sending borrowers into the official lending system (and the official numbers). It seems to be a public secret that a whole range of informal banks has closed lately. I don’t know the reason, but it corresponds well with the tighter informal lending system.

The combination of rising share prices on the back of growing state aid to industries, the ongoing concern from the central bank and the maybe “not as good as thought” December credit numbers confirms my skeptical view on the stock market.

I respect the wish among investors to jump on equities because it will turn the long term trend one day, but I regard it as a current optimism and keep the targets.

Targets: Hang Seng 11.000     Shanghai B 90

China – waiting for the Ox

Hang Seng (13.971)  Shanghai B (120)  USD/CNY (6,8350)

Very interesting with Hang Seng down 10% since last Monday and Shanghai B up with 5% during the same period. So let’s see what market is behaving most realistic.

Last Monday I mentioned the risk that the Chinese government could force Chinese banks to abandon normal risk control and management regarding lending to private households. On Tuesday (6^th Jan) the Peoples Bank of China came with different statements, among these:

“PBOC to guide banks to increase lending” and “PBOC to boost financing channels for small, medium-size customers”.

As you know, do I not recommend to be long any shares at all. Should there by coincidence be any, then I still argue that Chinese bank stocks are difficult to hold as the banks might be forced into lending risks they shouldn’t take.

Friday, the China business confidence for Q4 2008 was released showing 94,6. This is the lowest since the index was introduced in 2001. The manufacturing sector is the most pessimistic where we all know the story about the falling Chinese export, but domestic demand is also getting weaker and weaker.

The well known CNY 4 trillion rescue package announced last year, that lifted the global equity market for several days, is still on the drawing board with many details missing. In the meantime the first rumours about budget shortfalls are circulating. Some mention numbers between CNY 500 – 800 billion, where a somewhat higher number is more likely. If you subtract the already planned investments that very funny were included in the CNY 4 trillion package, and also subtract the coming budget shortfalls (in 2009 and probably also in 2010), then most of the CNY 4 trillion are gone………

Peoples Bank of China last week warned about difficult times, and also high ranking Communist Party officials have said that difficult times are under way for China mainland.

Even journalists lately were upgraded with an allowance to indicate the economic difficulties, though not write the full truth yet.

Coming back to the equity markets. Hang Seng is not like many other indices because of the over weight of banks and property companies. But it did actually react on the lending comments from PBOC and the general negative impulses from US. I would say it reacted realistic to the news.

As the frequent reader have noticed do I believe that Chinese stocks will turnaround among the first and that China will be a domestic driven economy sometime in the future. But it’s too early to enter the market. In Shanghai B is a full effect from the CNY 4 trillion rescue package and an upturn in the mainland economy priced in. In reality is the rescue package getting diluted and the economic downturn is accelerating.

I continue to keep the 11.000 target in Hang Sang and the 90 target in Shanghai B, as I see Shanghai B 25% overvalued.

It requires a very strong Ox to change that economic downtrend as soon as priced in the stock markets. 

Targets: Hang Seng 11.000     Shanghai B 90

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Fundamentals will continue to work……
Equities – 2009 will be a limbo dance – how low can you go?………

China – many hope that the year of the Ox will be better.

Central bank rates – Cutting as much as possible, and then what?

China – More wants to be long but the reality is nasty.

Hang Seng (15.046)  Shanghai B (114)  USD/CNY (6,8440)

Several times I have mentioned that Far East, and maybe even China as the very first, will be the region/country to rebound. Due to higher savings among many households in Far East, stronger balance sheets at many financial institutions in the region compared to the world, flexible labour market, low wages and very important a strong political will to get growth back on track as soon as possible.

In addition, the Chinese Communist Party tries to create a new domestic demand culture, and they are really putting effort into this.

Investors smell the corporate profit from this and the appetite for Chinese mainland stocks and Hong Kong based companies has been growing the last 2 – 3 months.

I can only repeat that I agree in being positioned in this area, when the timing is right.

When we reached the targets at 11.000 in Hang Seng and 90 in Shanghai B I suggested a rebound and then a move down towards these levels again. Now we certainly have the rebound, and you can blame me for not recommend to participate in the rebound. My fundamental view is longer and that makes tactical rebound positions more difficult.

The reason why I still think we will have the down move again is reality.

The Chinese export drop announced last week has almost become famous (-2,2% against expected +15%), but the details include even worse information. The export shows that global demand is cooling faster than anyone thought possible, but it might not be a surprise. The very unpleasant information, in respect to the above described investor hope, comes from the import figure.

Import was down with 17,9%, where lower commodity prices only explains half of the drop. We are talking about a real contraction in import volume that suggests a fast shrinking domestic demand in China.

The above described investor bet on being long or more long China is mainly based on the domestic demand story (of course supported by the very large fiscal stimulus package). Long term its right but it certainly looks like it will get worse before it gets better.

By the way do some bright people say, that in RMB terms the export was down 10,1% ………

Another number from China this week that could be interesting, the Real Estate Climate for November (no forecast but last time it was 99,68).

I keep the targets.

Targets: Hang Seng 11.000     Shanghai B 90

Currency markets – Mr. Trichet will cut but EUR is still a high yielder among G7.

EUR/USD (1,2640): This week the full attention is on ECB on Thursday and the US labour market data Friday. My best guess is that the market expects a 75 basis points rate cut from ECB on Thursday. I think it’s a fair guess where 100 basis points is more likely than 50 basis points if they consider anything else than 75 basis points. The comments will, as usual, be very interesting but hardly anything but sluggish. This might be expected but I think it will move the market anyway – lower within the current range. Mid term it will have an effect that the EUR rate is a high yielding currency among the major currencies when investors start to search for some return on the cash positions.

The US labour market data is the event of the week. Of course it will be a bad figure, we all know that (expected -325k / 6,8%), but fundamentally it is difficult to buy the greenback on the back of these numbers. The worry about the steepness of the US downturn will return. This combined with more people realising a coming problem from the fast growing US public deficit finally leads to a lower Dollar – have a look at the Treasury credit default swap, it widens every day…..

In the first part of the week I expect the current 1,2400 – 1,2900 range to hold, but the EUR/USD New York close on Friday is above 1,3000 going towards 1,3250.

Target: Range 1,2400 – 1,2900 followed by 1,3250.  

 
EUR/GBP (0,8315) – GBP/USD (1,5200): The 0,8250 target in EUR/GBP was reached followed by a nice rebound. I fear that the positive GBP sentiment mainly was based on the rising equity market last week. If that is the case I go for a offered Sterling sentiment this week. The big day is on Thursday where Bank of England will cut rates with 50 – 75 basis points, where 75 basis points is priced in the market. I actually think that the market reaction will be limited confirming that Sterling will enter a range for rest of this year.

The short term move will be to 0,8450 in EUR/GBP but I go for a 0,8100 – 0,8600 range for the rest of this year. Volatilities are high, but in my view it’s more a sign of usual risk takers are unwilling to take new risk than expectations about higher volatility in the underlying cash market. For those who have some risk appetite left, selling volatility with maturity before year end is an option. GBP/USD will move towards 1,5500.

Targets: EUR/GBP short term 0,8450, range 0,8100 – 0,8600 – GBP/USD 1,5500.

EUR/JPY (118,25) – USD/JPY (93,75): When I started on these comments during the weekend, EUR/JPY I judged EUR/JPY to be around 120,75. The views behind the comment are the same.

How many bad news can a market absorb? I don’t know, but Yen should have been beaten up. It’s only due to the well known capital flows that JPY is supported. The bad news out of Japan simply accelerates in speed. Japan is very export dependent so it’s natural Japan is hurt even more than the other major countries. As written under the equity part I continue to be bearish on the stock market which could force further JPY purchase leading to the target in EUR/JPY at 118,50 for the 3rd time. As I go for a stronger EUR, the 118,50 level could be a good entry point for a mid term long EUR/JPY position depending on how the market looks like if the level is reached. USD/JPY trades towards 90,00 followed by intervention from Bank of Japan, this will support the EUR/JPY position further.

Targets: EUR/JPY 118,50 – USD/JPY 90,00.
Equities – What a rebound but based on a partly state owned and weak banking sector…….

Nikkei 225 (8.397)  Topix (827)  Dax (4.570)  FTSE 100 (4.226) Dow Jones (8.829)  S&P 500 (896) Nasdaq Comp (1.536)  

Honestly, the rebound last week of course made me think, anything else wouldn’t be serious.

Last weeks rebound was significant but banks were in the lead. Some very respectable people in the market say that they buy shares in the banks where governments participate because it’s unlikely these banks will go bankrupt. I respect and even agree in that view. But that the banks have a major shareholder called “The State” doesn’t guarantee against bad business – on the contrary. The sector is reducing business globally, many can not pay dividends and more losses will come due to the global recession. I would avoid investing in this sector and I think some had, or will have, the same thoughts – pointing lower again.

The November car sales numbers released from Japan and Spain this Monday morning shows even worse drops than in October. Very symptomatic for the global demand that only will be helped slightly by some Christmas shoppers. That’s over in 3 weeks time, and I fear that Q1 will be ice cold.

The rate cuts from Bank of England and ECB on Thursday are priced in the market. The big event in the stock market is also the labour market data on Friday (expected -325k / 6,8%). Very bad numbers are expected, where some would claim that a “not as bad number as expected” will lift shares. Maybe, but I just have difficulties to believe that investors are happy to buy stocks with ongoing worsening macro economic data.

One thing I noticed, is that the lows in November in US and Europe were lower than the lows in October. But in Japan and Hong Kong the lows in November were above the lows in October. Maybe just a coincidence, but the turnaround will happen in Far East first when it happens.

My expectation is lower share prices in general by the end of this week.

I have adjusted the targets for Dow Jones and Nasdaq Comp accordingly to the new S & P 500 target at 656.

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (6185)  S&P 500 (656) Nasdaq Comp (1191)

China – The Friday package a usual, but the Monday version the world be more aware of.

Hang Seng (14.109)  Shanghai B (110)  USD/CNY (6,8600)

It seems to be a new habit among Chinese senior politicians to announce a new support package for the whole economy or the financial markets on Friday’s. This Friday it was meant to cheer the stock markets due to a report from Xinhua News Agency.

China’s national pension fund (China’s National Council for Social Security Fund) should plan to increase its investments in listed stocks. It plans to take strategic stakes in China Development Bank and Agricultural Bank of China. I doubt this can make Chinese equity investors more confident and it was more or less expected from some market participants.

Again it more shows how concerned the Chinese leaders are for a sharp downturn. This became very clear last Thursday as Mr. Zhang Ping, Chairman of the National Development and Reform Commission, warned against a coming decline in economic activity. He stressed that the government needs to take “forceful” measures to change the current slowdown. He directly mentioned excessive production cuts, factory closures and massive unemployment leading to social unrest.

The Communist Party seems deeply worried about this risk. Factories close down every day around in China and the unemployment is rising, but I fear that the Communist Party knows economic data that we don’t know……..

Mr. Zhang also gave some more details on how the RMB 4000 billion big economic rescue package will be used:

RMB 3000 Billion will be spent on infrastructure. The RMB 1800 billion goes to railways, roads and airports. Another RMB 1000 billion of the 3000 is allocated to disaster reconstruction particular in the Sichuan province, hit by a serious earthquake in May.

 RMB 370 billion China will use on rural development and RMB 40 billion health and education. More details will follow when they are released.

From another source I have heard that many hotels in Beijing around the government offices who handle these funds are fully booked. Province government officials have rushed to Beijing to apply for the funds.

A lot of work is done to change and push the domestic part of the Chinese economy. It will succeed one day, but as mentioned I am afraid that the economic truth is more unpleasant than we are aware of.

This was repeated by President Hu Jintao over the weekend, where he confirmed the worries of too low growth to meet the needs from a growing population.

Very coincident USD/CNY jumped to 6,8600 and even higher. The reason was said to be the bad PMI number Monday but we are talking about a small devaluation to support Chinese exporters. As mentioned for some weeks ago, G20 will have a more than a difficult job because all countries just want to export more in a world with less demand……..

A long term thought that investors should consider. The Chinese government is doing a big effort to develop the Chinese consumers as a part of changing the economy to a domestic growth story. It most likely also means that the Chinese people develop an opinion about their life as a whole. Ask Mr. Gorbachev if he succeeded in creating a system with free and liberal market economy but without a free political system………

Hang Seng proved to be more influenced by the global stock market environment, whereas Chinese mainland stocks are dominated by domestic China news. I think it will continue so this week as well. I see no reason to change the targets despite the current positive sentiment for global equities.

Targets: Hang Seng 11.000     Shanghai B 90

Peter

Delayed update from 26th Nov.

Stocks: Sunny side up these days, but don’t get toasted.

We never see the bottom, before after the bottom, but I doubt it was last week.

Stock markets are globally in the good mood due to the above rescue packages. Good that many equity investors focus at the short term benefit instead of the coming higher government bond yield. Going forward the higher yields will compete with stocks. With lower corporate earnings in the coming years is the only compensation to buy stocks at a lower price than current levels.

I conclude that global demand for all sorts of goods has declined so much (not just temporary stopped), that the market place has become smaller. Either can all sellers of the goods accept to sell with a loss or some needs to disappear. A simple protection for investor is to buy market participants with high equity (or small debt ratio’s), but it will be really hard for these companies to obtain a satisfactory ROE. A lower share price before investors buy is a compensation.

It could be that all bad recession news is priced in the stock market. It would just be very early in the cycle that the market is able to price the whole downturn in.

All in all am I still very sceptical regarding stocks. As mentioned last week when S & P 500 broke 820 on the downside I was going for a new and lower target – it is 656.

I respect that we are in a tricky territory, so I will look closer at equities in the next Weekly. Targets for Dow Jones and Nasdaq will be corrected lower accordingly.

Currency markets: Swinging like a share.

Almost as usual is the currency market following stocks. The 1,3250 target in EUR/USD is getting closer, but my view is based on a Dollar sell off and not a bullish equity market. I expect EUR/USD to move back to the 1,2400 – 1,2900 range followed by a break upwards.

The EUR/JPY target at 118,50 has been reached 2 times now but I believe in a 3rd times as well. USD/JPY is currently well supported around 94,00 out of Japan, but I stay with the 90,00 target followed by intervention by Bank of Japan.

Round about the same story for Sterling as it was helped higher by the dollar going lower, but I keep the downwards target in EUR/GBP

China: Fighting the recession dragon

Just a few, but important, numbers to highlight this time.

Today’s rate cut of 108 basis points is another sign of how fierce the Communist Party fights to boost the domestic economy.

I simply stay with the view the that one day China will become a new US demand machine, but the number of people who believes in that probably has gone up. A study I got across last week showed that for 12 months ago 19% of all asset managers was overweight China stocks, lately this number was 67%. Maybe the asset managers just reduced other countries, all in all there fewer remaining buyers. On the other hand, last week it was possible for an asset manager to raise USD 1 billion to invest in Chinese stocks.

Yesterday the World Bank revised the growth forecast for 2009 down to 7,5%, well below the official target of 9,0%. Why is the Chinese Communist Party so worried about that when rest of the world is in recession? Net 20 million people enter the labour market yearly. China needs a yearly GDP growth rate around 9% to absorb the growing labour force otherwise it feels like recession.

I stay with the targets reached once at 11.000 in Hang Seng and 90 in Shanghai B. 

Below you will find my weekly view on the very challenging financial markets. In my view it is still too early to enter anywhere with the strategic investments apart from oil – please read the Hot Topic below this entry. The China update every week is worth to read as China will overcome……

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

Currency markets – Capital flows are still making the lead.

EUR/USD (1,2710): Last week I thought it was time to focus on fundamentals. It turned out to be wrong and we are back in the situation where other currency pairs and equities decide EUR/USD movements. It’s difficult to say what economy looks worst but I keep my opinion that US is in the steepest downturn, leading to a rebound in EUR/USD one day. EUR/USD is nicely trading in the 1,2500 – 1,3000 range but a 1,2400 – 1,2900 is the one for this week.
The range trading in EUR/USD is a sign that the isolated EUR/JPY selling has stopped. We need to watch out for new lows in European equities. At that level further long European equities / short Yen could be closed.
The most interesting fundamentals this week are out of US, but they are not that serious as all eyes are on growth numbers. The US housing starts on Wednesday (expected 780k) I watch and then Philly Fed on Thursday (expected -35,0).
As I had the expectation of fundamentals returning as the key driver in FX I raised my target. I need to put it back to the range followed by 1,3250

Target: Range 1,2400 – 1,2500 followed by 1,3250.  

EUR/GBP (0,8460) – GBP (1,5020): 1½ weeks ago Bank of England surprised with 150 basis points. Last week they chocked the market with one of the most bearish central bank outlook I have seen for a long time. I thought all negative news was priced in but that was certainly not the case.

Regarding Sterling it’s more fundamentals deciding the trend compared to other currencies. Growth outlook is in focus but also public borrowing gets attention now. The political and central bank comments mean more than economic data. That’s what I keep an eye on this week.

The only good thing about the recommendation last week was the stop loss at 1,5420. The target was of course totally wrong. The economic situation in UK is gloomy, also more than in rest of Europe. Sterling will remain under pressure after the last Bank of England report. Depending on news about public finance I have the feeling that GBP will rebound a bit, and then we need to see what happens.

Targets: EUR/GBP 0,8250 – GBP/USD 1,6500 / stop loss 1,5200.

EUR/JPY (123,35) – USD/JPY (97,05): Good swings in JPY is still the case but as mentioned under EUR/USD it’s not limited to EUR/JPY anymore. Capital moves towards Japan sent EUR/JPY to the target of 118,50 last week, though also partly caused by EUR/USD trading lower instead of higher.

All economic data from any country is negative but I need to mention the Japanese GDP numbers. Not only was July – September negative but the April – June was revised further down. Some recessions have been technical recessions with 0,1 or 0,2% negative growth in 2 quarters. This time the numbers are very different – unfortunately.

If fundamentals decided the JPY trend, Yen would be much lower but the capital flows is the name of the game. Watch the stock market comments, it’s where the clues are. I keep the targets.

   
Targets: EUR/JPY 118,50 – USD/JPY 90,00.

Equities – Any good news left ? Certainly, the price for the last one was $700 bio, how much next ?

Nikkei 225 (8.523)  Topix (850)  Dax (4.616)  FTSE 100 (4.174) Dow Jones (8.497)  S&P 500 (873) Nasdaq Comp (1.517)  

Let’s start wit G20. G7 never really agreed on something apart from where to meet next time. Should it be easier when 20 countries needs to agree who should suffer the most (remember we are in a downturn – it’s not growth we are sharing) – to be honest I doubt it (please also read the China part).
They agreed to control the financial sector more. It might be correct to do so, but it doesn’t bring any growth right now. On the contrary will banks be more reluctant to do anything at all, including lending money out.
The coordinated fiscal driven global growth plan was postponed is my feeling. Or each country goes back home to support the domestic economy.
It’s ok that equity markets react negative as it underlines how serious the situation is. The politicians have realised how badly the global economy is looking and the markets can smell it.

As mentioned several times, is what we go through now the consequence of a credit bobble that busted. The asset markets are repricing, it’s very painful, but not a punishment of anybody. It feels like a punishment and those with high debt ratio’s are feeling this in particular.

If we believe in repricing of assets, there will be an overshooting on the downside, meaning cheap assets can be bought at a certain time. The golden question is, if one should buy at -25% or -90%? Too early to say, I can just repeat, don’t buy yet.

I feel it’s a bit overdone to mention any macro news from last week as they were all between very bad and awful.
No wonder that the G20 people are unhappy about the situation. They can’t avoid the recession, but should focus on avoiding the depression.
It seems sensible to use fiscal policy to fight the depression, but the good news cost a lot of money now. My best guess is that financial institutions will require more money. The automobile and automotive sector is the next to be rescued – how much do you want to pay? The rescue till come but not jobs will be saved, meaning more unemployed but not so many that we enter a depression.

Apart from the Chinese stocks (please read below) I still watch one thing in the Japanese market. Last week I wrote about the Japanese GPIF fund might buy stocks short term. Naturally it’s hard to get precise information, but during several sessions the Japanese morning is fairly negative but then the market turns back to almost positive territory followed by another sell off. A trading pattern that indicates a big player is in the market.

In US we actually reached the 820 in S&P 500 last week followed by an enormous rebound. I don’t regard the target as reached in the way that there is any need to change it. The rebound indicates that 820 in S&P 500 is a very interesting level (don’t buy even if we touch).
It also confirms that we enter a life where people buy shares for different reason. Long term technical support, emotional reasons like it feels cheap, or it’s a well known must have company. Different factors that aren’t based on rational thinking. Within the last days I have spoken with several private investors, who simply are happy to buy now – one day it will take over…..

In absence of true important macro economic figures this week, the markets will be dominated by the underlying macro gloomy outlook. Now and then with emotional or technical caused buying.
Just a few earning reports from US this week, Home Depot Inc. on Tuesday and Dell, Inc. is out Thursday.
 

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (7730)  S&P 500 (820)  Nasdaq Comp (1489)

China – Mainland stocks should have gone down but they went up……

Hang Seng (13.529)  Shanghai B (110)  USD/CNY (6,8235)

As discussed last week, the Chinese stimulus package was good news if the headlines were the truth. As mentioned, some economists took the news cautious and they were right to do so. Ahead of the weekend (but late enough so the G20 participants learned about it after the summit), it became clear that the stimulus package in reality is ¼ of the promised amounts. The rest (after all 75%) is planed to come from commercial banks, regions and other sources, but very unfortunate it is less realistic.

The Communist Party was very smart to let the stimulus package news overshadow the partly very bad news during last week. Fair, the Chinese equity market was buoyant, but maybe strange that it continued this morning, despite the adjusted details about the stimulus package.
 
There are rumours about a large government backed stabilisation fund in the size of RMB 600 – 800 billion aimed to support the domestic A shares.
As usual is nothing really confirmed but it sounds very possible. This was another key to the 17% rebound in A shares last week (B shares went 8% up).
At what level the fund gets active (if at all) is the current speculation, but some point at 1500 in Shanghai A as very important. That’s 30% down from today’s close, but when the plan was thought out the index was trading at 1800.

Last week I mentioned that some funds might be running short positions in Chinese B shares. If some are closed out I can’t say, but it of course fuels the upside.

I keep the targets for Hang Seng and Shanghai B. The reason is as mentioned several times earlier that I regard the globally bearish markets as the biggest danger to Chinese stocks. China will feel the global crisis even more, but the government is of all governments, the most active in supporting the domestic demand.

This leads to a line on USD/CNY. People’s Bank of China’s Zhou Xiaochuan hinted that China might let their currency depreciate. China also announced more export rebates (another word for subsidies) so they just need to restrict import, then they are running a full blown protection policy. All announced the days around the G20 summit – it look’s difficult for G20.    

Targets: Hang Seng 11.000     Shanghai B 90

Central bank rates

US Federal Reserve Bank: Now Fed is at 1,00%. They might cut again, but going below 0,50% is very difficult as money market funds will create a negative return. This would create too big problems is my view.

Bank of England: Now at 3,00% and they will take the base rate lower is they find it necessary.  

European Central Bank: Further cuts are already priced in. Some ECB members signalised another 50 is possible, and it seems to happen before Christmas.

Bank of Japan: 0,30% and they might even cut again, but of course it won’t change anything.

I am looking forward to your comments and wish everybody a profitable week.

Peter