Okay, I feel a little lost here. Already on February 16th I wondered how long the rally was going to last, then – despite a sharp decline in the German IFO index – announced on February 23, the hausse kept going – into March. To sum it up, despite ongoing bad news from the world economy, stocks (at least in Europe and the US) and commodities have rallied since 11 February:
Since its low of 8,752 on 11 February, the German stock index Dax has gained more than 1,000 points and reached 9,824.17 on 4 March. Similar rises occurred in most of the important stock indices worldwide. Also, while Commodities were generally crushed during at least the last six months, especially oil, WTI crude reaching its recent lows on 11 February with 26,21 USD/bbl. Since then, the price has rebounced to 37.90 on 7 March. But also iron ore has been rallying – well since mid-February… Also, the Baltic Dry is going through the roof – well, since 11 February…
So, was that it and the rollercoaster has come to an end – we are all going to live happily thereafter? Given new China data, I still doubt it:
Chinese Exports dropped by more than 25% YoY in February (and imports by nearly 14%) and had already dropped by 11% in January (so before the current rally!). Also, due to overcapacities in its industrial sector Chinese Government announced the lay-off of around 6m workers (which would compare to a lay-off of around 260.000 workers in Germany! On a side-note: everybody seems to assume that the Chinese economy is still growing – nobody uses the „R“-word. Why?).
So, if its not the end of the bear-market, why are markets „behaving“ like they currently do?
A rather simple explanation for the rise in stock-markets could be that market-participants do not act rational anymore, but cling on every hope that „everything goes back to normal“. Historical chart analysis shows that during the Great Depression the „best“ bear-market rallys occured.
One explanation put forward for the rise in commodities is that somebody has (deliberately?) crushed the speculators who shorted commodities and especially stocks of companies in the US-oil drilling business. There also seems to be hints at a (hidden) trade-war between Saudi Arabia and the US regarding the respective oil-producing facilities.
Another sign for a bear-market is that Gold is soaring together with shares. Also, it should be observed that the BDIY might rise due to expectations of more transportation of commodities – while the Chinese Containerized Freight Index is falling back to all-time lows at the same time. The latter might already reflect the sharp drop in trade in and out of China.
My current take-away from all this information is that the world economy is still in a decline – however steep it may be in the end. However, since investors are humans, they (still) live in a certain state of denial. Time will show but my guess is that even if Marion Draghi does not outrightly disappoint the markets with the measures announced today, the bearish trend will resume in the next two to three weeks. And then we are in for another rollercoaster…