Opportunities for stock markets in the middle term
The U.S debt ceiling drama did hurt the market confidence as it showed the non-functioning Washington. It also helped S&P downgrade U.S. long term debt one notch to AA+. The long term impact of U.S downgrade would be much far-reaching and will shake the global financial foundations. It will definitely increase the market volatility as well and complicate any long term investment commitment by global institutional investors.
However, the dramatic stock tumble during the last three weeks give the opportunity for mid term investment.
Valuation of the stock market and bonds : Much cheap stocks comparing to bones will lead to a bounce up in the middle term
Valuation of U.S. and world stocks is relatively cheap comparing to government and corporate bonds. This is a strong long term support and leads us the rally since March 2009 and still holds very well during last several weeks bloody crush. As the market will up and down in next few weeks, the market is testing S&P@1040 which had strong support last year. With the fear cooing and the 3rd/4th Quarter results announced in the year end, we could see a substantial rebound from the recent lows.
Banking worries and balance sheet
Banking balance sheet is very healthy comparing to 2008. With the U.S treasury yield in historic low and Italy &Spain bonds near 5%, the balance sheet of global banks are stronger than three weeks ago.
U.S GDP and inflation
The inflation is the GDP growth killer both from CPI and worsened the U.S common account deficits. U.S economy is more vulnerable than China on oil price hikers. The recent market crash helped to beat the oil price in the reasonable range and hopefully will stay at 70-80 ranges in the rest of the year. The low oil price will not only give U.S consumers more disposal free income, but also will give a boost to GDP growth and consumer confidence for Q3 and Q4.
European Market Risks
As I mentioned in my last notes, Italy and Spain solvency issue could really kill the market. We witnessed a 5% one day drop triggered by Italy worries accompanying by U.S GDP slow down data.
We should be extremely alarm and watching very carefully about development in European. Any major breakout in another side of Atlantics could really kill the market. ECB stepped the efforts and bought Italian and Spanish
QE3 and Fed meeting next week
Fed has made the decision to maintain Fed Fund rates 0-0.25% till June 2013. This is a strong support for any bank run and set a flow for all asset prices
Fed may start a new QE3 till we see substantial market and commodities retreat. The economy was turning around in Q32010 without QE2. The market crash this week is partially attributed to the unnecessary QE2. As the market crush and economy stalled in recently, the Fed may weight towards QE3 by the end of Aug
H.K market and China, no crisis seen for Local government loans.
Again, HK market witnessed sharp retreat as well as it is highly espoused to European and export risks. China government is more than happy about the commodity retreat during the last few days.
From our monitoring systems, we could see China central bank is easing credits in the last few weeks. Low commodity price and low CPIs will give China more freedom for easing policy by the end of the year. China A shares may have a buying opportunity in the next 1-6 months.
Chinese local government debts risk is visible and already priced in the current bond and stock markets. China Central government has a world leading healthy balance sheet and positive cash flow.
We could never separate China local and central government because of its unique political system.
China PMI and strong P7 common account surplus warranties the fundamental soundness of the company.
Gold and commodity
Commodity such as oil is a long term bet though we should Not over weight in next few weeks. Gold is already hitting the new high and we may see a near term top. We could sell gold for a short term high profit
The U.S debt drama and European solvency crisis strengthened the Gold position in global long term asset allocation portfolio. We should still hold the gold for middle to long term benefit.
The stock market risk is substantially low comparing to my last notes back months ago.
Treasury/bonds are overvalued and stocks could see a rally show in the middle term ( 1-5 months). Short term, the market is seeking the bottom in next few weeks mainly because of fear and bearish momentum. If global investors are not withholding their U.S investments, we could see the market retest 52 weeks high by the end of the year.
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