Why the circa 1000pt drop?

As the world’s 2nd largest economy, China’s economic strength not only reflects the economic confidence of the Asia-Pacific region in general, but that of the whole world as well. It’s been the biggest market in the world for commodities for some years, fuelling a huge commodities boom that now appears to be subsiding along with the Chinese economy itself. Not only has this cultivated fears of a slowdown in demand for basic materials which has put pressure on the mining sector that contributes so heavily to the UK 100 , it’s cast doubts as to how far we can actually trust the data coming out of China as attention remains fixed on its ‘exotic’ stock market rather than its economy.

The fact is that some very big names in business (including the boss of mining behemoth BHP Billiton (BLT)) have recently come out flying the flag for China. This all points to an emphasis on fear rather than what’s actually going on in China.

“… we have continued to experience strong growth for our business in China through July and August”
Apple CEO Tim Cook “We’re still seeing strong sales of iron ore, coal, and copper moving into China”
BHP Billiton CEO Andrew Mackenzie

“I remain an unabashed bull on China”

WPP CEO Sir Martin Sorrell

In the US, meanwhile, the rate hike soap opera continues amid fragile inflation growth caused largely by very low oil prices. There’s a certain amount of boredom with this, but it remains an important driver due to its impact on the strength of the Dollar and ergo all Dollar sensitive markets – think commodities and international debt denominated in the US currency.

Well, the Fed remains divided and it appears we’ll be spared interest rate rises in 2015 because of recent volatility, which is going to be good for equities.

The fact that the recent sell-off has exposed some very reasonably valued stocks given the outlook for the remainder of the year should be getting investors returning from holiday (those who ‘sold in May’) excited!

Market Observations

UK 100 Index

UK 100 Daily Chart

(Click on image to enlarge)

The UK 100 is now trading at levels not seen since 2013, in an area of support between 6000 and 6200. Of interest on a technical level is the daily RSI indicator, which hasn’t spent much time in oversold or overbought territory for the past 24 months. When it has been oversold, there’s been an average subsequent up move of around 400 points. Likewise, when the daily RSI has gone overbought significant corrections have often followed, making for plenty of opportunity to profit from riding the swings in the index itself.

It’s thought that considerable exposure to China has stung the UK 100 and its constituent stocks, but recent comments from big business chiefs – think the likes of BHP Billiton’s Andrew Mackenzie, Apple’s Tim Cook and WPP’s Sir Martin Sorrell – would indicate otherwise. Could it be that it’s not Chinese economic slowdown per say that caused the late August sell-off, but merely widespread fear of a Chinese economic slowdown?

Fact: If one believes the data is at least somewhere approaching accurate, then China is still growing faster than the UK, Europe and the US.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
W. Buffett