What goes up…

…must come down. It was a soft end to August overall. Despite a 6.7% fall in Chinese stocks on the last day of the month, global equity markets for the most part registered gains over August. For example the S&P 500 registered a healthy 3.4% increase in August compared to close to a 15% drop in Chinese (Shanghai B) equities. The phrase, “the higher it goes, the harder it falls” looks appropriate in the case of Chinese stocks; at the time of writing, year-to-date the S&P 500 is up around 13% compared to a 68% gain for the Chinese stocks.

Looked at from another angle the S&P 500 is up an impressive 51% from its low in March 2009, whilst the Shanghai index is up a whopping 113% from its low in October 2008. Much of the selling in Chinese stocks as usual appears to be rumour based with talk of more lending curbs in China and a report that China’s state owned enterprises may terminate commodity contracts with foreign banks spurring the initial selling. The law of gravity suggests that Chinese stock may have further to fall.

The fact that the sharp sell off in Chinese stocks is having only a limited impact on other markets is an interesting development in itself. It suggests that investors in other markets and products are not getting too carried away with China stock watching. In particular, currencies appear calm despite the volatility in Chinese stocks and generally correlations between equity markets and currencies remain low according to my calculations (happy to provide correlation coefficients to anyone who is interested).

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