Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
Today's headline was graciously provided by a brilliant tweet from Brenda Kelly, head analyst at U.K.-based London Capital Group.
Chinese equities were bludgeoned overnight and things would have been a lot worse if the 70 per cent of the market that hit the 10-per-cent limit down barrier and stopped trading were allowed to fall further. As it was, the Shanghai Composite ended lower by 7.9 per cent for the session and is now 19 per cent down from the recent peak.
Chinese equities have often followed their own path – falling when the economy was strong and rising when things looked weak. For Canadian investors, the path of the Shanghai market often doesn't matter all that much. The Chinese economy, however, does and the extent to which the equity market reflects an ongoing squeeze for corporate borrowers, the sell-off is relevant for domestic portfolios.
Credit and monetary growth has a direct influence on the S&P/TSX composite. Easy money in China allows for the funding of infrastructure projects which create demand for commodities. Importantly, loose monetary conditions also allow non-economic Chinese businesses – notably in steel and construction – to remain in business despite widespread overcapacity. This also supports commodity demand and prices.
The chart for the Shanghai Exchange, by the way, looks like death warmed over.
As a general rule, when anything happens in Chinese asset markets investors' first step should be to find David Keohane's analysis.
"Calling a top in China" – Keohane, FT Alphaville (registration, but not subscription required)
"Chinese Stock Plunge Leaves State Media Speechless" – Bloomberg
"70% of Shanghai Composite has hit downward limit" – FastFT
"@petesweeneypro I would like everyone to imagine what would be happening in China if there weren't a max 10pct down daily limit" – Twitter
Numerous reports indicate that Potash Corp. of Saskatchewan is negotiation to acquire German fertilizer provider K&S for something in the neighborhood of $9-billion (U.S.). The Wall Street Journal report strongly implies that the deal is defensive for Potash – an attempt at controlling supply to prevent another steep commodity price drop:
"K+S is likely to reject the offer as too low, according to the person familiar with the matter. K+S is developing a mine in the western Canadian province of Saskatchewan and believes Potash Corp.'s offer doesn't take into account potential synergies and the dominance this would give it in North America, the person familiar with the matter said.
As new mines come into production during the next five years, supply is expected to surge. Unless demand, especially in China and India, increases as sharply as was expected when companies invested in expansion, prices could suffer further."
"Potash Corp. Offers to Buy K+S" – Wall Street Journal
Recently-public company Juno Therapeutics Inc. highlights the extraordinary new research happening in the cancer treatment field. I'm not suggesting buying the stock – it's an all-or-nothing investment – but investors should be on the lookout for biotech company successes in the sector:
"In 2013 [ a patient's] cancer, acute lymphoblastic leukemia, was destroyed with a new type of treatment in which cells from his immune system, called T cells, were removed from his blood, genetically engineered to target his cancer, and then dripped back into his veins… earlier results in Philadelphia and New York had been close to miraculous. In 90 percent of patients with acute lymphoblastic leukemia that has returned and resists regular drugs, the cancer goes away. The chance of achieving remission in these circumstances is usually less than 10 percent."
"Biotech's Coming Cancer Cure" – M.I.T. Technology Review
I want to thank all of the many readers who responded to my request for feedback on Wednesday. The responses concerning China have already been helpful – informing the first few paragraphs of today's post.
Tweet of the Day: "@fastFT $767bn market cap wiped out in China plunge today. As a reader points out, that's more than Apple's $734bn mkt value. http://www.ft.com/intl/fastft/350851
"Netflix Is About to Be Bigger Than ABC, CBS, NBC, and Fox" – Gizmodo