Tuesday, February 27, 2007

Today's "Crash"

Stock markets all over the world sold off heavily after a rumor that the Chinese government will impose a capital gains tax. A rather weak argument for the relatively dramatic sell-off we saw today considering 1) That it is just so far a rumour which has yet to be confirmed 2)Chinese equity capital is still relatively insignificant.

Considering the irrational ground for today's sudden move, this would seemingly appear to be a buying opportunity. And indeed, unless the markets are hit with more bad news, a recovery in stock prices seems highly likely.

However, I am not sure I would recommend people to buy stocks as I do in fact expect more bad news.

Update: The Chinese government now explicitly denies the rumour.

3 Comments:

Anonymous Dir t masing said...

Maybe the rumoured capital gains tax in China started the sell-off. Well, at least it did in China but the ensuing decrease in shar eprices in Europe and the US may have completely different causes:

1. The sub-prime lending issue has been brewing for a couple of weeks now. If sub-prime problems spill over to mortgages, the US economy could face serious problems and fall into recession
2. The Yen-funded carry trades could be set for a reversal, strengthening the Yen even more, forcing more reversals and so on... That would take away a lot of liquidity from financial markets causing falls at least as steep as last May
3. Just plain risk aversion. The VIX volatility measure almost doubled (biggest move ever) in one day. Maybe this was sparked by China but the underlying reason probably has more to do with the prolongued bull market and investors being overinvested and thus the market was generally prone to reduce risks at the first sign of real trouble.

Dir T Masing

9:36 AM  
Blogger Ernesto said...

With a part of the derivatives market which felt the heat yesterday as the stocks collapsed, when they will really start being challenged (June-December)we will be facing a severe credit crunch. And that is BEFORE the recession sets in. Not AFTER, as is the economic norm.

Ernst

10:53 PM  
Blogger Ernesto said...

With the derivatives market having felt the heat in yesterday's market collapse, when they really will be challenged (I expect June-December) we will have a severe credit crunch. Remember, debt is a claim on money, while money is a claim on assets. This credit crunch will be felt BEFORE the recession sets in, and not after, as is the norm.

Ernst

10:59 PM  

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