Three faultlines are shaping the market’s future

Germany is frustrated, China is changing direction and the US is cutting its spending. All of this will influence stock markets in directions that are yet to be seen.

Europe, China and the US are changing directions and the outcome of those directional changes will determine the future levels of stock markets.

In Europe, Cyprus is simply a symptom of German frustration. Week-by-week they are paying the bills to keep a combined Europe afloat and their wealth is being drained. When people react in frustration they often do not see the long-term consequences of their actions. In the case of Cyprus, the Germans did not realise that by attacking bank deposits they were jeopardising the European banking system (The EU has thrown Cyprus to the wolves, March 18).

The Cyprus crisis may pass, but is a sign that German frustration is rising as their savings are being drained, so we are going to encounter more crises – particularly as more countries realise that the Irish formula to drain German money by making bonds very long term and fiddling the amounts owed looks to be working (Ireland finds a pot of gold for its debt, March 14). 

In China, we are going to see good figures in the next six months or so as last year’s stimulation flows through. For a while some may think that it's business as usual. But China’s new Premier Li Keqiang has vowed to change direction. If that directional change is merely to stop building large government buildings and catch a few corrupt officials then our commodity exporters will breathe happily. But if Li is serious – and I think he is – then he will begin to lessen China’s dependence on exports and on huge capital investment. That will then be replaced by consumer demand. The changeover will not be easy and there will be bumps.

Consumers will want cars and appliances but they will also need services and their overall requirements will not use as much steel as bridges and buildings. Raising interest rates for savers will be part of the changeover because it changes the flow of money from leveraged capital projects to savers who will drive  consumer spending.

The residents of Beijing want action on coal pollution and Li and his government have to decide whether to implement the clamps on coal usage (China will spoil Australia's energy equation, February 22).

In the past, the flush of liquidity from US money printing has boosted both commodities and shares. This time commodities missed out which is a sure indication that commodity markets are betting on meaningful change in China’s direction.

Then in the US we may have a mini Cyprus as it rams through spending cuts, but the base direction of the US has changed and it's on the rise – driven by shale gas and oil. As that improvement gathers momentum so there will be speculation over a contraction of money printing (The US market steamrolls on, March 12).

And while that may also interrupt US progress it will not stop the momentum.

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