Markets: Chinese market yo-yo

The market's volatile run has continued with the benchmark selling off as investors remain uncertain about Chinese growth.

What a difference a day makes. Yesterday all 10 sub-indexes rose more than 1.5 per cent, helping the S&P/ASX200 Index to a 2.6 per cent rise. Today the reverse is true.

At 1324 AEST all of the market’s 10 sub-indexes had fallen, seven by more than 2 per cent. That has pushed the benchmark index down 106, or 2.2 per cent, to 4728. 

The S&P/200 Index has fallen six out of the last nine trading days. Investors are uncertain on how to deal with a rising interest rate environment, says Matt Sherwood, the strategist at fund manager Perpetual.

“For the first time in five years rates are rising,” says Sherwood, referring to US 10-year yields that were at 2.47 per cent in Tokyo trading this morning. Rising rates have traditionally been bad for stocks as it makes other investments such as term deposits more attractive.

Treasury yields are rising on the Ben Bernanke effect. The Federal Reserve chairman has said the US central bank will pare back its $US85 billion worth of monthly Treasury bond purchases. Perhaps just as much of a concern for Australian investors is economic news closer to home.

Reserve Bank of Australia governor Glenn Stevens said today in Brisbane the local economy has yet “to negotiate the downward phase of the investment boom”. This, he says, is “likely to pose significant challenges”.

Stevens says economic growth in China, Australia’s biggest trading partner, will probably be 7.5 per cent compared with previous years when growth was 10 per cent. Citigroup China analyst Shuang Ding does not think the Chinese government will stimulate the world’s second-biggest economy.

There is also heightened financial risk in China. Nomura says China’s non-performing loans are rising. Today, Chinese stocks fell, led by banks such as the Industrial & Commercial Bank of China. On June 20 China’s overnight lending rate between banks hit a record 11.7 per cent. Chinese President Xi Jinping and Premier Li Keqiang want to stop speculative lending that is driving up prices and causing social dissatisfaction.

The Australian dollar’s fall to US cents 91.14 at 1328 AEST from US cents 91.47 yesterday is evidence that foreign investors are continuing to sell their holdings in Australian stocks. Such a process probably gathered pace from April 10 went the Australian dollar was trading at $1.0543 to the US currency. The Australian dollar has plunged 14 per cent since then.

Foreign fund managers are unlikely to reverse course and buy Australian shares until there is greater certainty in the economy and corporate earnings turnaround.

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