Good news on Wall Street, worries on the Great Wall

A turnaround or just a quick bounce on the way down?

Given the turmoil of the past few weeks that has seen all the Australian gains of 2013 evaporate, only either the brave or foolhardy would believe the former.

Wall Street’s recovery overnight, up about 0.7, backed up by more serious rises in Europe followed some better than expected economic readings, including a bounce in consumer sentiment and improvements in new home sales.

That is a major shift. For once, Wall Street welcomed positive economic news rather than run on fears better news may prompt the Fed to reduce its economic methamphetamine dosage. Perhaps, the addicts have grown accustomed to the idea that they will have to dry out at some stage.

The more steadying influence, however, appears to have been the pronouncements of Federal Reserve members this week, arguing that policy settings and announcements need to take market volatility into account.

During the past six weeks, Ben Bernanke has been anything but a steadying hand on the market. His tapering sermons have sparked a revolution on global capital markets, as huge volumes of cash shifted out of bonds, commodities and emerging markets.

Given the bubbles that have formed in bond markets since the great money printing experiment began in the wake of the financial crisis, the shift was never going to be easy.

It is worth noting though, that Wall Street is still well into positive territory for 2013, up around 12% and some of the flows last night indicated that cash was moving out of bonds and into equities.

For Australian investors, China remains the major concern.

The credit squeeze, which has seen interbank lending rates soar in recent weeks, has also hit the Shanghai stock market, which now is in bear territory having fallen 20%.

Unlike America, Chinese authorities have taken a hard line approach to the nation’s debt problems and its rampant credit growth this year.

The People’s Bank of China declared on Monday that liquidity was at “reasonable levels” while the official news organ the People’s Daily thundered that the central bank would not play “wet nurse” to banks or the stock market.

This laissez faire approach runs several risks. The first is the possibility of a failure of some financial institutions, speculation of which thankfully has eased in recent days.

But the broader problem is that if monetary authorities are determined to slash credit growth, then achieving broader economic growth goals of 7.5% would appear to be impossible. It is one or the other. You can’t achieve both.

Then again, in China, the economic numbers generally are what the government wants them to be. It sets the target and then collects and publishes the data.

For the next few weeks at least, volatility reigns supreme.