Today I thought I would look at an issue that central bankers would describe as a Wealth Effect as they smile and look pleased with themselves. We started the early part of 2024 with this being in play in Japan as we saw the Nikkei 225 equity index pass the 1989 highs after taking some decades to do so and then passing 40,000. In fact it went over 42,400 in July. This was a state sponsored plan as it was one of the objectives of Abenomics although sadly poor Abe san did not live to see it. In fact we saw the most literal version of the central bank “put” or if you prefer Plunge Protection Team as the Bank of Japan came in as a buyer on down days. On that road it became The Tokyo Whale as it bought over 37 trillion Yen of equities which must have a value of somewhere north of 80 trillion now.
The US
We can now switch to the US which has seen that game in town for much of this year as we have seen both the Dow Jones Industrial Average and S&P 500 reach all-time high after high.
Stocks rose for a second session Wednesday, with the S&P 500 and Dow Jones Industrial Average closing at records, as technology stocks powered higher and investors shook off geopolitical concerns.
The S&P 500 rallied 0.71% to end at 5,792.04 after notching an all-time high, while the Nasdaq Composite added 0.6% to finish at 18,291.62. The 30-stock Dow surged 431.63 points, or 1.03%, to settle at 42,512.00 and at a record close. ( CNBC)
The beat goes on and it has had this feature.
Nvidia shares have rallied 25% in the last month and are currently trading at $132.11. That’s inches away from its record close of $135.58. Nvidia is now the world’s second biggest company in terms of market capitalization, overtaking Microsoft and behind only Apple. “We see NVDA remaining the leader in the AI training and inference chips,” Mizuho analysts wrote in a note on Wednesday. ( CNBC)
We started with what was called The Magnificent Seven and now we seem to be down to what De La Soul would call Three is the Magic Number. Market concentration like this keeps increasing the risk as everyone’s money is in ever fewer stocks. Remember passive investing reinforces this as a higher market value for a share means a passive fund has to buy more and the game continues. The problem is that the reverse is true on any fall which is how it can quickly become a dive.
There is the issue that Federal Reserve policy even at the new reduced interest-rate of 4.75% is supposed to be restrictive and they might call it highly restrictive. But if we stay with the headline act in this game which is Nvidia it is not far off completely irrelevant. With a dividend yield of 0.04% then you are not buying it for yield or carry. Instead it is the lure of a share that is 189% higher than a year ago. With a capital gain of that magnitude people would be happy to pay rather more than 4.75% to borrow money to invest. Of course the profits are looking backwards rather than forwards but greed here trumps fear at least so far. So the concentration has made “restrictive” monetary policy ineffective and we instead see more and more new highs.
Actually the risk is increasingly world-wide.
United States about to own 50% of the World’s Market Cap ( Barchart)
So world equity trackers and the like will be in on this particular game. As we stand the Swiss National Bank with all its US equity market holdings will be thinking they are investing geniuses.
China
Two Mondays ago China decided that it wanted a piece of the equity market action.
The third is to create new monetary policy tools to support the stable development of the stock market.
As I pointed out back then it seemed to be having the desired effect.
China’s blue-chip CSI 300 index of Shanghai- and Shenzhen-listed shares rose 3.8 per cent on Tuesday following the announcement. Hong Kong’s Hang Seng index rose 3.9 per cent, led higher by mainland Chinese companies listed in the territory. ( Financial Times)
Having lit the blue touch paper China was able to retire because it had the rest of the week off via a sequence of public holidays. On Tuesday Xinhua declared something of a glorious triumph.
BEIJING, Oct. 8 (Xinhua) — The combined turnover of China’s Shanghai and Shenzhen bourses reached 2.48 trillion yuan (about 350.74 billion U.S. dollars) in the morning session on Tuesday, nearing the 2.59 trillion-yuan historic high of full-day turnover recorded on Sept. 30.
China’s major stock indices were higher after Tuesday morning, with the benchmark Shanghai Composite Index up 4.81 percent to 3,496.82 points at midday and the Shenzhen Component Index soaring 8.25 percent to 11,398.95 points.
The ChiNext Index, tracking China’s Nasdaq-style board of growth enterprises, jumped 14.26 percent to reach 2,485.34 points at the conclusion of the morning session.
The problem is that yesterday was not like that.
The CSI 300 was down 7.1% today. If these declines continue, it will be hard to see how the credibility of the regulators won’t be seriously diminished. I guess most of us will be waiting for Saturday’s MoF press conference to see what fiscal support they will deliver, and how. ( Michael Pettis)
Today was mixed.
BEIJING, Oct. 10 (Xinhua) — Chinese stocks closed mixed on Thursday, with the benchmark Shanghai Composite Index up 1.32 percent to 3,301.93 points.
The Shenzhen Component Index closed 0.82 percent lower at 10,471.08 points.
So we have seen a ramp followed by rather a plunge as Blood Sweat & Tears explain.
What goes up must come downSpinning Wheel got to go ’roundTalkin’ ’bout your troublesIt’s a cryin’ sinRide a painted ponyLet the Spinning Wheel spin
Yes China has rallied the market overall but we are nowhere near the peaks of Tuesday. If we look at the CSI 300 index we see an intra day peak of 4450 on Tuesday, but a close of 3997 today. So in fact the best move on Tuesday was to sell into the rally which is hardly the message we were supposed to be getting. When looking at India yesterday I noted some had been suggesting switching from its market to China and they may already have singed fingers.
It looks as though China does intend to keep trying though.
China’s central bank has set up a swap facility to provide liquidity to institutional investors to buy stocks, part of a broad stimulus package announced earlier. ( @business)
Although not everyone seems to have got the message.
Nearly 100 A-share companies released stock reduction announcements in two trading days after market rally. ( @YuanTalks)
Comment
The Wealth Effects game stretches beyond just house prices and has been strongly in play so far this year. Even the UK FTSE 100 long a struggler made a new high in the 8400s. Compared to house prices it is much harder to identify inflation because there is also some genuine growth as well. But then we see the Dax of Germany where economic struggles are combined with a sequence of all-time highs in 2024.
One of the metrics that should be in play is bond yields which have been rising recently. But to some extent the main movers in the US have avoided this as what is a 0.4% rise in bond yields when you have made 189% over the past year?!
But one thing we can see is that China wants to be a player in this game.