Last week has been an eventful one for the markets, with the week starting out bad with a Black Monday of sorts, before recovering back a fair bit. Is the market cleared to return back to normal levels with the worse behind us or is this the calm before the storm?
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First we have to look at the reasons for the crash and the subsequent recovery. The crash was likely due to a combination of the crashing China stock market, the negative reports on China manufacturing and the resultant devaluation of the yuan. The recovery on the other hand, is due to the Feds indicating that they may not raise interest rates in September (or so I've heard), which would drive up share prices.
The reasons for the crash have not disappeared, they are still lingering. This could come back to haunt us in the near future. The China stock market is currently being held up in part by efforts of the government, which has recently decreased the its central bank's benchmark one-year lending rate by 25 basis points in an effort to boost the market. I'm not really sure on this, but I don't think the government would be able to hold up the stock market for too long, especially in a free market economy. The government's efforts may only be delaying the inevitable.
But this may not have such a great effect on the rest of the world. Some brands may have had their sales in China dipping, but if we actually look at the impact that the stock market is likely to have on Chinese consumer demand, it is relatively small. Household wealth in China is not made up primarily of investments, with stocks only accounting for around 9 percent of household wealth in China. The gains and losses made in the Chinese stock market are likely to just be paper ones and may not affect the greater economy as a whole as detrimentally as we may imagine.
Looking at the Feds possibly maintaining interest rates during their September meeting, this doesn't seem to be a very convincing reasons that shares are likely to go up. I think that this is not something that is likely to be able to continue driving the market upwards as the gains due to this are likely just to be one-off and a turn in investor sentiment may wipe this off (no one will borrow money to buy assets when they're dropping in prices no matter how low the interest rate). But this may be able to act as a catalyst for future growth if positive news hits the market.
I'm split on whether the market has seen the worse and is just starting to recover. I think the focus would be on China as to whether the market is likely to go up or down. There are other factors that may affect such as another sovereign debt crisis which some countries face the risk of, such as Puerto Rico. The market may just continue to be jittery until more information on China is available.
Almost forgot, the elections may be another cause for concern. In my opinion, a change in government or a loss of the two third majority needed to make constitutional changes may affect the stock market, but I'm not really sure of the effects, whether they be positive or negative (especially since neither has happened in our history since independence). So I guess we'll just have to wait and see on this.
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But this may not have such a great effect on the rest of the world. Some brands may have had their sales in China dipping, but if we actually look at the impact that the stock market is likely to have on Chinese consumer demand, it is relatively small. Household wealth in China is not made up primarily of investments, with stocks only accounting for around 9 percent of household wealth in China. The gains and losses made in the Chinese stock market are likely to just be paper ones and may not affect the greater economy as a whole as detrimentally as we may imagine.
Looking at the Feds possibly maintaining interest rates during their September meeting, this doesn't seem to be a very convincing reasons that shares are likely to go up. I think that this is not something that is likely to be able to continue driving the market upwards as the gains due to this are likely just to be one-off and a turn in investor sentiment may wipe this off (no one will borrow money to buy assets when they're dropping in prices no matter how low the interest rate). But this may be able to act as a catalyst for future growth if positive news hits the market.
I'm split on whether the market has seen the worse and is just starting to recover. I think the focus would be on China as to whether the market is likely to go up or down. There are other factors that may affect such as another sovereign debt crisis which some countries face the risk of, such as Puerto Rico. The market may just continue to be jittery until more information on China is available.
Almost forgot, the elections may be another cause for concern. In my opinion, a change in government or a loss of the two third majority needed to make constitutional changes may affect the stock market, but I'm not really sure of the effects, whether they be positive or negative (especially since neither has happened in our history since independence). So I guess we'll just have to wait and see on this.
If you have enjoyed this post and would like to receive notifications on new posts, you can subscribe to my blog via email or like our Facebook page
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