China puts a drag on global equities

There are a few things going on in the global economy that’s been dampening investor’s moods.

US earnings have not been inspiring and for the first month of this year, including this week, the equity market has been lacking in conviction to move in either direction. Since last year, there have been talks of when there will be a correction? It looks like the dips we have been seeing, so far, is not enough for investors who are waiting to buy into dips to take action.

They prefer to sit on the side-lines and there is a good reason for this. Despite the talks of a better global economy, for this year, there are underlying weaknesses in pockets of the global economy.

In the US, macroeconomic data points to things looking better. The existing home sales of $4.87m for December, was the final figure that put a strong finish to the end of 2013, it is the strongest it has been over seven-years.

The existing home sales in the two-months of November and December were the slowest sales month for the year of 2013, after a peak in July of $5.39m. This shows that the market is cooling. The high cost of owning a home and mortgage rate means there’s a falling affordability factor. Jobless claims showed a slight increase of 1000 reaffirming the general consensus of an improving labour market.

Instead, US investors paid attention to China’s manufacturing flash PMI as it went below 50 – they did not like it. The glimpse of what’s lying underneath the economy has caused a concern. Investors reacted with sell-offs in the emerging market ETFs with -2.5% and punishing ishares China to -4.5%.

In other parts of the world, the Eurozone aggregate composite PMI for January in manufacturing and services showed an improvement, with 53.9. This is reflected in the euro rallying to its highest level since December. At this point, it is clear that weakness in China is greater than the Eurozone’s possible deterioration.

The resounding effect of China is felt in today’s Asian opening prices as the Nikkei, Shanghai composite and Hang Seng are all pointing to a lower open.

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