Thursday, March 16, 2006

Suddenly, Everything's Rosy?
Equity Markets Turned Positive (Again)

Hong Kong shares made their biggest gain in six weeks yesterday, sparked mainly by property stocks rising on easing fears over further US interest rate hikes, and by China Mobile, which is expected to report better-than-projected results today. The blue-chip Hang Seng Index surged 200.6 points, or 1.29% to 15,720, the steepest climb since January 27 when it jumped 1.5%. Hong Kong's property shares recouped recent losses to post their biggest one-day percentage rise in nearly three weeks. The Hang Seng property sub-index rose more than 2% to 19,263. Top property gainers included Henderson Land, whose shares rose 3% to HK$42.95, and Sino Land, up 3.2% to HK$11.30. Shares of local property stocks had been staggered recently by renewed concern over potential interest rate hikes in the United States. Last week, long-term US treasury yields spiked to their highest levels in 21 months. But the softer-than-expected February US retail sales figures calmed the anxiety, precipitating the largest one-day plunge in US long-term treasury yields in six months overnight Tuesday. US retail sales last month fell 1.3%, steeper than the 0.8% decline predicted.

My BIG PICTURE comments a week back seem to be coming to fruition - watch the consumer prices in the US (or in this case, retail sales) as that would give strong directional momentum for investors to reframe their decision making.

Its kind of funny because the oil inventory in the US also continued rising, which put to rest the fear of high oil prices (temporarily). I did mention that the recent oil price spike was due more to fear than real fundamentals - the continued rise in stockpile of oil inventory further reassured investors. Does that mean the Iran thing is no big deal? It is still a big deal, and both US and Iran are shoving and pushing each other still. I mean, Iran is the second largest oil producing OPEC nation and could hold the world's supply at ransom - but the higher inventory levels in the US did help to allay those fears, plus other friendlier OPEC nations could step in to counter any shortfall by Iran. However, Iran's economy could suffer greatly if a prolonged curtailing of supply is mandated - so, unlikely to happen, and even if it did, it will be short-lived.

The main argument is that US wants Iran to stop its nuclear weapons programme. This time around, Bush is smarter by calling on all 15 council members of the UN Security Council to back him by issuing a statement to call on Iran to suspend uranium enrichment efforts. Russia and China remain the two who wants the "statement by the Council" to be watered down. Economic and/or political sanctions could be imposed on Iran. I don't think Bush wants to go down the road of another costly invasion so soon. Even airstrikes would be a no-no as once you start something like that, you have to follow through in a big way till completion. So, the threat of airstrikes and invasion are there, but not likely this time around. Certainly the UN and allies to the US would not want to see another Iraq-like invasion so soon.

The other main reason for the bullish tide of change was the spectacular gains made by China's yuan yesterday. It registered its biggest one-day gain against the dollar since revaluation, buoyed by technical buying. The move also followed comments by Premier Wen Jiabao on Tuesday reiterating Beijing's pledge to tolerate a more flexible currency. The yuan closed at 8.0377 versus the dollar, up 0.12% from Tuesday's close of 8.0473. The currency hit an intraday high of 8.0373. The one-day gain marked the first time the currency had risen more than 0.1 percent in a day. What is more important is not that the yuan gained ground but that the authorities in China "allowed" the currency to rise. This move would indicate a more concilliatory strategy to work with the US to redress the trade imbalance problem. Good for China and the US, good for the rest of the world.

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