BT: It's the US slowdown fears, stupid (12 Mar 2007)

It's the US slowdown fears, stupid

By R SIVANITHY
SENIOR CORRESPONDENT

So was it China, the unwinding of the yen carry trade, worries of a rapid US economic slowdown or some cobination of all these that shook up the stock markets a week ago?

Also - and this is surely the question on everyone's minds - does the bounce from Tuesday to Friday mean the worst is over?

When the Chinese stock market plunged 9 per cent on Feb 27, it was said to have triggered selling in all other equity markets, including Wall Street later that day. That explanation has been accepted without much question and seems to have already passed on as a fact.

In hindsight, though it does seem a tad simplistic, the Chinese market had more than doubled in value in the past year and the damage to the domestic economy was known to be minimal - so there was no reason to expect such ferocious selling elsewhere.

The unwinding of the yen carry trade carries more promise as an explanation. But until more is known about the numbers involved, it's difficult to say categorically whether this was the sole reason or not. The best that can be said is that a sudden spike in the yen destabilised sentiment and led to some panic selling in stocks that had already risen sharply for many consecutive months.

Fears of a sharp US economic slowdown, however, is the most likely reason. First, it's not coincidental that Wall Street's slide started around the time ex-Federal Reserve chairman Alan Greenspan spoke of a possible US recession later this year.

(The irony of this won't be lost on those who have tracked the US market since it was Mr Greenspan who revived stocks in the first place, by slashing interest rates to one per cent in the wake of the dotcom collapse of 2000).

Second, Wall Street's rise on Friday was apparently in response to a stronger-than-expected jobs report which eased slowdown fears (though, conversely, this also lessens the chances of an interest rate cut, but we'll leave aside such confusions for now).

Third, if the economy is not slowing, then this means the market can continue to place its faith in present Fed chairman Ben Bernanke's assessment of a rosy 'soft landing'. In which case, earnings can support higher prices and the party can carry on.

Is the party ready to resume, or do the guests need more time to shake off the excesses of the past year? The near-unanimous mantra from the investment community over the past fortnight has been that this was not the start of a bear market, but merely a bull market correction because 'the fundamentals haven't changed'.

Cynics and contrarians might note that when everyone says the same thing, then it's reason enough to doubt it. And if the US really is slowing, then there could be trouble ahead, possibly soon.

But for now, we'll leave the last word to the staunchly bullish BCA Research, which says this in its latest Global Investment Strategy report: 'Just as the despair of investors a week ago was excessive, the sharp rebound of the past few days also looks a bit overdone. A typical bull market correction runs two-three months with the S&P 500 dipping 7-8 per cent. By this script, the current correction might be only half way through'.

For emerging markets (EMs), it says 'the plunge has removed some frothy conditions but equities are not yet at oversold extremes that typically indicate bottoms. EM stock indices remain above their 200-day moving averages and most technical indicators are not yet flashing oversold conditions. EM corrections have typically ranged between 10 and 25 per cent over the past five years while the current selloff has only cut prices by 10 per cent'.

It, however, adds that the longer-term outlook is still positive. Globally, equities are cheap - and this is not the beginning of a protracted bear market.

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