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China Stimulus: Does it Signal Panic?
China Stimulus Larger Than Expected
Last night, China’s leadership shocked global markets with a new stimulus package to boost the country’s ailing economy and stock market. Though most Wall Street analysts largely expected a stimulus, few predicted the magnitude of the stimulus package. The evidence? The iShares China LC ETF ((FXI - Free Report) ), a ordinarily slow-moving proxy for large-cap Chinese stocks, exploded by more than 8% in Tuesday’s session as volume spiked to five times the 50-day average.
Image Source: TradingView
China’s latest stimulus package includes:
· Interest and mortgage rate cuts, with more likely to come.
· Eased regulations on second-home purchases.
· Decreased the required reserve ratio for banks.
Beyond these drastic measures, policy makers disclosed that they are weighing a “stock market stabilization fund.”
How Should Investors Interpret China’s Stimulus?
Investors should disregard opinions and instead focus on liquidity. Through years of experience, I have discovered that the old Wall Street adage “Don’t fight the Fed” rings true. Wall Street legend and billionaire investor Stanley Druckenmiller describes it best:
“Earnings don’t move the overall market; it’s the Federal Reserve Board. Focus on the central banks and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”
Chinese policymakers injected the economy with a lot of liquidity and promise to increase that liquidity in the coming months. Don’t overthink things!
Sentiment Around China is Poor
Many investors and Wall Street banks remain bearish on the Chinese economy. However, savvy investors understand markets bottom when poor news hits a fever pitch. Furthermore, markets discount the future. Several Chinese ADRs, such as Alibaba ((BABA - Free Report) ) and JD.com ((JD - Free Report) ), are confirming their multi-month uptrends and are rising on massive volume.
China’s Potential Impact on U.S. Commodities & Stocks
Investors should also understand that the Chinese unleashing liquidity on their market has global implications. Tesla ((TSLA - Free Report) ), which operates in China, should see sales continue to tick up. Meanwhile, commodity stocks like Freeport-McMoRan ((FCX - Free Report) ) should also benefit.
Bottom Line
Chinese policy makers announced a larger-than-expected stimulus package overnight. Investors should ignore the noise and instead focus on the liquidity and price action (both of which are bullish)