Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
The 8.5-per-cent slide in Chinese equity markets Monday was the equivalent of a 1205-point drop in the S&P/TSX Composite. The government bailout of equities, an "all hands on deck" ocean of public and private funds in the past few weeks, was nowhere to be found.
The direct effects of China's bear market on the economy are likely not great – few Chinese citizens hold significant equity portfolios. However, the apparent failure of the government rescue may result in a lack of faith in the state-driven economy. As one example, despite mediocre corporate profit levels and extreme debt levels in the country, 97 per cent of corporate bonds are rated AAA. This is only conceivable if investors have faith that the government will backstop every debt issue.
"Can All Chinese Debt Be Rated Top Quality?" – Wall Street Journal
"Chinese Stocks Tumble, Suffering Biggest One-Day Drop in Eight Years" – NYT Dealbook
"7 questions that help you understand the Chinese stock market crash" – Mashable
"China's capital outflows are accelerating at an alarming rate. Chart via Goldman: pic.twitter.com/LUQpjUcnnl " McGeever, Twitter
The volatility in Asia is having an inevitably negative effect on commodity prices. West Texas Intermediate Crude is lower by 1.15 per cent at the time of writing and Brent crude (most closely connected with Chinese demand) is down 1.5 per cent. Copper, surprisingly, is holding on well, but soft commodities are sharply lower – corn prices have fallen 2.8 per cent.
Bloomberg reports that oil futures markets represent the most pessimistic view in three years,
"net-long position in West Texas Intermediate contracted 28 percent in the seven days ended July 21, U.S. Commodity Futures Trading Commission data show. Long positions dropped to a two-year low while short holdings climbed 25 percent… "Supply is still in excess of what would balance the market," Katherine Spector, a commodities strategist at CIBC World Markets Inc. in New York, said"
"Oil Bulls Are Fleeing at the Fastest Pace in Three Years" – Bloomberg
"Oil Slides in Bear Market as U.S. Drillers Increase Rig Count" – Bloomberg
"Oil groups have shelved $200bn in new projects as low prices bite" – Financial Times
Report on Business' Mike Babad details a CIBC study that throw some cold water on the proposed increase in Canadian child benefits,
"if consumers spend all of that money on Canadian goods and services, which CIBC described as an "extreme" scenario, gross domestic product would benefit by 0.8 per cent in the current third quarter, or 3.2 per cent at an annual pace.
That extreme is relative to what economic growth would have been had the previous child tax credit system continued, explained Mr. Shenfeld, CIBC's chief economist. But the fourth quarter would then suffer, by 2 per cent, if consumers are still "that myopic" after the next election because payments would then be monthly, rather than the earlier six-month bonanza."
"'Shiny' cheques" – Babad, Report on Business
Berkshire Hathaway's Charlie Munger is the closest thing we have to A Yoda-level philosopher in financial markets. Fortune magazine outlined Mr. Munger's wisdom regarding the current interest rate environment which basically boils down to "don't try to predict anything, and don't listen to anyone who does",
" I can remember 1½ percent rates. It certainly surprised all the economists. It surprised the people who created the life insurance industry in Japan, who basically all went broke because they guaranteed to pay a 3% interest rate. I think everybody's been surprised by it, including all the people who are in the economics profession who kind of pretend they knew it all along. But I think practically everybody was flabbergasted… I think it's highly likely that the people who confidently think they know the consequences – none of whom predicted this – now they know what's going to happen next? Again, the witch doctors."
"Quote Of The Year From Berkshire Hathaway's Charlie Munger" – Fortune
Tweet of the Day: "[Private] The real story on oil is not spot. It's the back end of the curve, which continues to make new lows."
Diversion: "The automation myth: Robots aren't taking your jobs— and that's the problem" – Vox
Scott Barlow