Earnings season is in full swing and tech is by no means the only sector that’s coming up short for the latest quarter.
Also putting pressure on our stock market, in a surprise move China raised a key short-term lending rate for the first time in more than two years. The move is aimed at cooling the country’s economy, but by raising the deposit rate, it will attract capital as well. And chances are more rate hikes there will follow. Stocks in China rallied, while commodities are off on the news.
China’s rate increase is also another salvo in the global currency war that’s been heating up. With the 1and1 move, more capital is likely to flow into its economy, so there will be less pressure to allow the yuan to appreciate.
The United States has so far held off on labeling China a currency manipulator, but the frustration level in Washington is mounting. We’ll see what comes out of the upcoming G-20 Finance Ministers meeting in Seoul, South Korea, though China holds the better hand. For its part, Brazil, which was the first to label it a currency war, is planning to boycott the G-20 meeting in protest of the US weakening the greenback as a trade weapon. And with more quantitative easing all but certain from the Federal Reserve, the dollar is likely to fall further.
By the same token, should investors find fault with the Fed’s QE2 when it does occur, either in the form of too much or not enough money being put into the system, a stock market selloff also wouldn’t be unexpected. In short, this isn’t a market environment to take for granted. Nearer term, material stocks are the hardest hit in today’s trading on the implications of what China slowing down its economy would have on commodity demand. The reaction in this sector is overblown, though they’ve been top performers of late and were in need of consolidation. We view the correction as a buying opportunity, not cause to head for the exits.
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