Global Investing: No Asian Persuasion

In my recent post about the potential Chinese bubble, reader Ron responded that stock markets can’t be controlled by governments.

While that may be true, government decisions or policy changes, however, can be just as effective in controlling market direction. Such was the case yesterday when the Chinese government announced a tripling of the tax on stock trading to curb excessive speculation. The response was swift as the Shanghai Index lost 6.5% for the day.

Most world markets joined in the early sell off, but recovered later on and, in the case of the S&P; 500, a new lifetime high was made. The chart below shows yesterday’s price activity of the Shanghai Index vs. the S&P; 500:

Why weren’t world market more affected in the same way as they were back in late February when the Shanghai Index dropped 8.5%?

While there could be many reasons, I think one of them is that it is now almost expected that the Chinese market at one point in the future will correct sharply. Wall Street tends to react more kindly to anticipated events as opposed to sudden surprises.

Second, the release of the minutes from the last Fed meeting gave the bullish crowd further ammunition to push the major indexes higher. The minutes said that, although housing weakness continues to go on for longer than expected, the SubPrime markets appear to have been relatively stable.

Nevertheless, I find it ironic that on the day of the second largest correction on the Shanghai’s stock exchange, the S&P; 500 managed to take out its old high from 2000. Given the interconnectedness of the world markets, I don’t think we will see this kind of “disconnect” very often in the future.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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