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ETF Periscope: Drop in China Manufacturing Suggests Hard Landing May Remain in the Cards
“Everywhere is within walking distance if you have the time.” -- Steven Wright
Wall Street was in a festive mood on Friday, as the leaders of the European Union (EU) announced a plan of action that actually seemed to address some of the immediate Eurozone issues that have contributed to the general downtrend which the global equity markets find themselves in.
It will be interesting to see how investors proceed after they have a few days to consider what the latest round of solutions shall actually accomplish.
One of the key points to emerge from the recently concluded EU summit was that there would be a single supervisor for Eurozone banks. This would be a significant preliminary step that could lead to the direct capitalization of the region’s banks, which have ongoing liquidity problems, some of which can be traced to flight of capital by depositors.
The EU is effectively saying that it will open up its permanent rescue fund, the European Stability Mechanism, which currently has pledges of about $620 billion dollars, and to make those funds available to meet the needs of the Eurozone’s cash-strapped banks. Whether this amount will be sufficient to deal with the shortage may not be the real question, however.
It is likely that the ongoing problems created by the Eurozone’s soaring sovereign debt rates will continue, at least until some form of Eurobonds is established to share debt in a more equitable manner.
For the moment, at least, investors liked what they heard on Friday, as the Dow Jones Industrial Average (DJIA) notched a 2.2% win; the S&P 500 (SPX) topped that by gaining 2.5%; and the Nasdaq Composite Index (COMP) shot up a healthy 3% for the day.
Will the gains hold, or will new job numbers out of Washington give investors a reality check that ends up bouncing? Stay tuned this holiday-shortened week.
What might be something that has been off of investors’ radars recently might end up having a strong impact on their portfolios as the year continues to unfold.
That something is China, whose red-hot economy has suffered significant cooling over the last several months. While the slowdown could be considered a good thing, as opposed to an economy that shoots too high up the thermometer, the degree of that slowdown has caught analysts by surprise.
The latest numbers out of China indicate that the manufacturing sector, which has been a key driver of the economy over the last decade, continues to grow, though the recent trend is one of decline. The Purchasing Managers Index, for example, fell from 48.2% in May and hit 48.2% in June. Not a large number in itself, but rather the continuation of a trend that is worth noting, and one investors should keep an eye on, even through the dust of the Eurozone commotion and the recent round of predominantly disappointing domestic economic reports.
What the Periscope Sees
If investors are concerned that the trend in China may continue in the current direction, a short on the Chinese economy could be worthy of consideration. By shorting MCHI (MSCI China Index Fund), an ETF that tracks the MSCI China Index which measures the performance of large-cap Chinese equities, investors could hold a position that allows for potential profit should the slowdown trend in China continue along its current trend.
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.