Thursday, March 19, 2015

Chinese Stocks Part Ways With Copper Price (excerpt)

Foreign investors were permitted to purchase shares of companies listed on the Shanghai Stock Exchange in mid-November of last year. Previously, only a select group of institutional investors who met certain qualifications had access to Shanghai's $2 trillion market. As the property market has cooled, more individual investors have turned to the stock market. The number of new stock accounts opened last week in China reached the highest level in five years. The result is that the Shanghai A-Share Index (in yuan) is up 44.4% since November 14.

Now imagine what might happen to stock prices if the Chinese authorities decided to devalue their currency. It has soared relative to the euro and the yen, and many other currencies. However, it has been edging down relative to the US dollar since early last year.

For now, China’s economy remains challenged, as growth seems to be slowing faster than expected. But that’s bullish since the monetary and fiscal authorities will respond by providing more stimulus. Interestingly, the price of copper was highly correlated with the China MSCI stock price index (in yuan) from 2009 to 2013. Since early last year, the divergence between the two has widened as the former has decreased and the latter has increased. That’s because bad news is good news for stocks, for now.

Today's Morning Briefing: Pete & Repeat. (1) Age-old riddle. (2) Abbott & Costello. (3) Seeing a pattern. (4) BOJ buying equities on dips. (5) Wage hikes in Japan. (6) Weak yen, strong Nikkei. (7) Weak euro, strong DAX. (8) Bad news in China is good news for stocks. (9) Why isn’t falling copper price depressing EM stock prices? (10) Fed remains implicitly patient. (11) Yellen sees more room for improvement before first rate hike. (12) Fed decision bullish for stocks, bonds, and commodities. Bearish for dollar. (13) Thank you, again, Godmother and Godfathers. (14) Raising odds of the Irrational Exuberance melt-up scenario. (More for subscribers.)

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