Stocks opened higher yesterday on hopes of a coming bailout for the auto sector, but there are immediate reasons to worry whether recent gains will hold.
Here are two: China and bonds.
The Chinese economy is in trouble. From the FT:
The accident waiting to happen has happened. China, having helped propel global growth by tooling up and churning out cheap goods for much of the past decade, is crumpling. Official data released on Wednesday removes any doubt. Foreigners are investing and buying less: November foreign direct investment fell by a third from a year earlier while exports fell 2.2 per cent, the first year-over-year decline since February 2002. Deflation is even a possibility, with annual producer price inflation plunging to 2 per cent in November, less than one-third the October reading.
China held out longer than most; much of the developed world is already in recession, after all, and a number of developing countries are teetering on the brink. Now that the brakes are coming on in China, however, a ripple effect is inevitable as demand for oil, iron ore and all the other commodities required to industrialise the country shrinks. Australia is an early casualty. Within 24 hours of central bank chief Glenn Stevens flagging the China risk, Aussie miner Rio Tinto unveiled plans to slash 14,000 jobs.
Meanwhile, this week returns on short-term U.S. Treasury bonds fell to zero and some are negative.
That means buying three-month Treasuries now equal lending the government money with no expectation of a return or even at a slightly loss, and scared investors are still buying in an attempt to stash their money. From Bloomberg:
If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56.
Taken together, a worsening slowdown in China and new signs of renewed investor fear argue against a continued recovery for stocks.
