September 27, 2012 at 09:28 AM EDT
Focus Shifts To Hopes For China Central Bank Stimulus!
Tuesday, September 27, 9:25 a.m. With no follow-through so far to the initial two-day spike-up global rallies in response to the ECB’s ‘whatever it takes’ program, the U.S. Fed’s QE3 announcement, and Japan’s additional stimulus plan, hopes for more market support have shifted to China. After five straight down-days for the S&P 500 in the [...]

Tuesday, September 27, 9:25 a.m.

With no follow-through so far to the initial two-day spike-up global rallies in response to the ECB’s ‘whatever it takes’ program, the U.S. Fed’s QE3 announcement, and Japan’s additional stimulus plan, hopes for more market support have shifted to China.

After five straight down-days for the S&P 500 in the U.S., downside reversals in Asia since the initial spike-up peaks, and a big plunge in European markets yesterday as the rescue of the eurozone debt crisis runs into stumbling blocks, markets are bouncing back today, reportedly on new hope that China will join the stimulus parade.

The hopes come on the report last night that the plunge in corporate earnings in China continues to accelerate. The combined profits of China’s major industrial companies fell 6.2% in August, even steeper than July’s 5.4% decline, and the 2.7% decline over the first 7 months of the year.

China’s stock market bounced 2.6% last night after hitting a new 3 1/2 year low Tuesday night as China’s central bank again injected liquidity into the banking system, reaching a record amount for this week through short-term reverse currency repurchase operations.

Previous similar short-term operations have had no discernible effects, and markets have been hoping for something more permanent like further cuts in interest rates and in required reserve ratios (RRR) for banks. China lowered RRR three times since 2011 and cut interest rates in June and July, but has done only short-term currency repurchase operations since.

China has been reluctant to ease monetary policies in those more traditional ways of cutting interest rates and RRR, reportedly waiting until the new government leaders take over later in the year. However, there may be more to the reluctance than that. China is concerned about its real estate sector and the potential for lower interest rates and RRR to set off another round of real estate inflation that has been such a problem in recent years.  

However, with last night’s report on a still accelerating decline in corporate earnings that has China’s stock market in a severe bear market, hopes are high that China’s central bank will be forced to try to come to the rescue.

An advisor to the People’s Bank of China (PBOC) told reporters, “We have indeed underestimated the severity of the external economic situation.” And added that further stimulus will depend on “the degree of deterioration of the external situation”, by which he apparently means the worsening economic slowdowns in Europe, the U.S., and the rest of the world.

But the Vice-governor of China’s Central Bank says, “Monetary policy faces a dilemma. On the one hand the central bank needs to stabilize economic growth, but on the other hand it is very worried about the problem of property prices.”

However, at least today, markets are apparently convinced aggressive easing will finally take place in China as soon as next week.

China’s stock market could sure use a lift. Even last night’s big rally of 2.6% is hardly a blip on the chart.

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Global slowdowns support hoped-for easing by China.

If further easing by China’s central bank (PBOC) depends on “the degree of deterioration of the external situation”, as stated by an advisor to the PBOC, it is seeing the degree of global deterioration worsening.

Not only in its own country’s reports, but pretty much globally.

In Europe, as the Financial Times puts it this morning, “Every time Europe’s leaders are given a breathing space by the European Central Bank, they return to their petty disputes and progress stops.”

Pretty much the same thing can be said about the U.S. Congress.

Fed Chairman Bernanke has warned that the Fed has only limited tools from the monetary side to help the economy, that Congress needs to come in with help from the fiscal side, particularly to resolve the fiscal cliff concerns that kick in with the new year. But the Fed provided another attempt with QE3, taking the pressure off Congress, and Congress recessed until after the November elections.

They will no doubt get the fiscal cliff resolved, or at least kicked down the road at the last minute, but it’s going to take some panicked late-night and weekend sessions when they get back to get the issue resolved in time.

Meanwhile, this week’s economic reports include that the Chicago Fed’s National Business Index fell further in August, dropping to –0.87 from – 0.12 in July. More ominous, the more important three-month moving average fell from –0.26 in July to –0.47 in August, its 6th consecutive negative reading. And this morning it was reported that Durable Goods Orders plunged 13.2% in August, much worse than the forecast of a 5.3% decline. And 2nd Quarter GDP was revised down to just 1.3% from the previously reported 1.7%.

Meanwhile, the Business Roundtable reports that confidence among U.S. corporate chief executives has hits its lowest level in 3 1/2 years.

Do we even have to wonder why?

Subscribers to Street Smart Report: There is an in-depth U.S. Markets Signals and Recommendations Report from yesterday in your secure area of the Street Smart Report website. And there will be an in-depth ‘Global Markets’ Update there later today.

Yesterday in the U.S. Market.

Another low volatility, light volume day. The Dow traded in a narrow range of just 74 points from its intraday high to its intraday low, with only 0.7 billion shares traded on the NYSE.

It was another case of strength in the morning, weakness in the afternoon, with the market closing just about on its low for the day.

The Dow closed down 44 points, or 0.3%. The S&P 500 closed down 0.6%. The NYSE Composite closed down 0.7%. The Nasdaq closed down 0.8%. The Nasdaq 100 closed down 0.8%. The Russell 2000 closed down 0.6%. The DJ Transportation Avg. closed down 0.1%. The DJ Utilities Avg closed up 0.1%.

Gold closed down $11 an ounce at $1,754 an ounce.

Oil closed down $1.23 a barrel to $90.14 a barrel.

The U.S. dollar etf UUP closed up 0.2%.

The U.S. Treasury bond etf TLT closed up 1.1%.

Yesterday in European Markets.

European markets plunged sharply yesterday. The London FTSE closed down 1.6%. The German DAX closed down 2.0%. And France’s CAC closed down 2.8%. Italy closed down 3.3%. Spain closed down 3.9%. Russia closed down 2.1%.

Asian Markets were down sharply Tuesday night but bounced back some last night.

The Asia Dow closed down 1.3% Tuesday night, and back up 0.9% last night.

Among individual markets last night:

Australia closed up 0.5%. China closed up 2.6% after hitting a new multi-year low Tuesday night. Hong Kong closed up 1.1%. India closed down 0.3%. Indonesia closed up 1.0%. Japan closed up 0.5%. Malaysia closed up 0.4%. New Zealand closed unchanged. South Korea closed up 0.4%. Singapore closed up 0.4%. Taiwan closed up 0.2%. Thailand closed up 0.9%.

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Markets This Morning:

European markets are bouncing back some from their big plunges of yesterday. The London FTSE is up 0.2%. The German DAX is up 0.3%. France’s CAC is up 0.7%

Oil is up $1.14 barrel at $91.12

Gold is up $12 an ounce at $1,766.

This Morning in the U.S. Market:

This week is a quite heavy week for potential market-moving economic reports. They include the Chicago Fed’s National Business Index, New Home Sales, Durable Goods Orders, Chicago PMI, Consumer Confidence, etc. To see the full list click here, and look at the left side of the page it takes you to. The quarter’s quadruple-witching expirations also take place on Friday.

Monday’s report was that the Chicago Fed’s National Business Index fell further in August, dropping to –0.87 from – 0.12 in July. More ominous, the more important three-month moving average fell from –0.26 in July to –0.47 in August, its 6th consecutive negative reading. And the Dallas Fed’s Mfg Index improved in September, but remained negative coming in at –0.9 versus –1.6 in August.

Tuesday’s reports were that the Case-Shiller Housing Price Index showed U.S. home prices rose in July for the 4th straight month. The Conference Board’s Consumer Confidence Index rose to 70.3 in September, its highest level since February. And the Richmond Fed Mfg Index improved from –9 in August to +4 in September.

Yesterday’s report was that New Home Sales were down fractionally in August, to 373,000 from July’s 374,000, virtually no change. The median price rose 11.2%, but primarily to a bigger percentage of larger homes in the mix of new homes being built.

This morning’s reports are that new weekly unemployment claims fell by 26,000 last week to 359,000, better than the consensus forecast of a decline to 375,000. The four-week moving average declined to 374,000. Durable Goods Orders plunged 13.2% in August, much worse than the forecast of a 5.3% decline. But the core rate which excludes volatile defense and aircraft orders, rose 1.1%. And 2nd Quarter GDP was revised down to just 1.3% from the previously reported 1.7%. (This was the third and final review of 2nd quarter GDP).

Still to come are Pending Home Sales, which will be released at 10 a.m.

Our pre-open indicators have been positive all night, apparently on the hopes that China will provide a more meaningful stimulus plan for China’s economy.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being up 70 points or so in the early going.

To read my weekend newspaper column click here: If You Like QE3 But Stock Market Makes You Nervous – Buy Gold! Sept. 22.

Subscribers to Street Smart Report: There is an in-depth U.S. Markets Signals and Recommendations Report from yesterday in your secure area of the Street Smart Report website. And there will be an in-depth ‘Global Markets’ Update there later today.

I’ll be back with the next regular blog post on Saturday morning, as usual later than the week-day reports, probably around 11:30 a.m.

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