spiking upwards. The uncertainties with the equity markets are forcing investors to seek shelter in other markets. China’s stock market has become one of the investment of choice amongst investors.
Shanghai composite’s underperformance shows a low correlation of 0.117 to the S&P 500, and a low forward PE ratio of eight, which is below the average of 17 for the past three-years, making it attractive.
The Chinese leader’s vow to revamp the capital markets to shows that the country is moving towards the right direction, being in-line with international standards. Fears of a slowing economic growth in China, which was one of the reasons underpinning the stock market, should have abated.
The Hang Seng China index show shares in the mainland are trading at a discount to Hong Kong equivalent. President Xi Jinping has prepped the market to expect slower growth next year by 0.1 percentage point to 7.5%. Given the official’s track record this year in successfully managing market expectation, this slower growth will be priced in.
Last night, the stronger economic data from the US was a surprise. It has erased the uncertainty from Wednesday’s weak ISM services and strong ADM employment. The Q3 GDP growth is revising to 3.6%, the expectation was 3.1%. The initial jobless claims have dropped to 298k, compared to last week’s 316k. However, the headline number masks some of the underlying weakness in the economy.
The GDP upward revision is backwards looking, mainly due to an inventory build-up, therefore Q4 will be difficult. Seasonal variation makes the jobless claims difficult to read, despite the better number, economists still see the trend of firing continuing and it won’t have an impact on the low participation rate.
Regardless, this has sent yields on the ten-year Treasury note higher to 2.872, at an 11-week high. The expectation of higher rates, going over the 3% level is putting pressure on the rate sensitive stocks, such as telecom and housing stocks. The higher rates would also impact the housing market going forward, and add pressure to the declining new home sales.
The importance of job creation in the US economy means all eyes will be on the employment data tonight.