In the United States, bad economic news is cause for buying. Good economic news is cause for selling.
Don’t expect the same phenomena in Australia.
Depressing economic data out of the US has fuelled share purchases in the US because of perceptions the Federal Reserve would continue its monthly $US85 billion bond buying program, injecting much needed liquidity into the financial system to ensure there is credit for borrowing. Positive economic news has resulted in the opposite effect because of concerns it would lead to a withdrawal of the Fed's punchbowl that investors have lustfully lapped at, sending the S&P500 Index up 16 per cent this year.
As it dawns on investors that the Fed is about to withdraw quantitative easing, global markets are volatile. Few see much upside happening until the market absorbs the Fed’s action – perhaps not until September.
In Australia, foreign fund managers have taken their profits and largely gone home. Not only are they worried about how global stock markets will react to the end of QE, they are concerned the Chinese economy is slowing faster than official statistics say.
If there are concerns over China then Australia can hardly expect renewed money to flow into its stock market. Australia’s biggest exports to the world’s second-biggest economy, China, are iron ore and coal. Nomura warns that “corporate expectations for strong investment after the (Chinese) leadership transition have been disappointed”.
But if many are disappointed in China’s new leadership, then there is almost complete disillusion with Australia’s government. That has meant business confidence and investment remain depressed.
This is bad for stocks.