Date
30 March 2017
Glencore Plc. is an example of the distorted correlation between asset prices, liquidity and zero interest rates. Photo: Reuters
Glencore Plc. is an example of the distorted correlation between asset prices, liquidity and zero interest rates. Photo: Reuters

How stock market trends reflect economic outlook

The S&P 500 Index has surged 5 percent in recent trading days, reflecting market relief at the Fed’s decision to delay a rate hike.

Since the end of August, the index has swung 160 points in either direction, or about 8 percent from the present level, while the Hang Seng Index has fluctuated by about 1,500 points or 7 percent.

There have been no substantial factors behind the volatility which means the only reason for it is speculative sentiment over the timing of the Fed liftoff.

Traditionally, stock indices should be a leading indicator of the real economy.

But I doubt this principle still works.

At present, the ups and downs in the market may not be grounded in fundamentals.

It appears that stocks are simply being left in the hands of central bankers and policymakers.

Many recent studies link the trend in the stock market to the timing of the US rate hike because they believe the cost of money can be considered separate from the real economy.

I don’t agree with them.

If the market only reflects monetary policy and capital liquidity while neglecting the real economy, it can be compared to a luxury car without tires.

Can such a car run?

The correlation between asset prices, liquidity and zero interest rates is distorted.

One example is the Swiss energy giant Glencore Plc. (00805.HK).

The stock fell almost 30 percent and closed at a record low on Sept. 28 over concerns it is not doing enough to cut its debt amid falling global metals prices.

It bounced back by about 70 percent after the company announced plans to cut prices and sell off agriculture assets.

Glencore Plc. is not a small cap. It is a constituent of London’s FTSE 100 and is worth 17 billion pounds (US$26 billion).

The fall happened at the same time as the Fed was hesitating whether to raise interest rates by the end of the year or next year.

As of last week, Glencore’s price was down 79 percent from what it was at the beginning of the year.

That means we cannot separate the stock market from the real economy.

This article appeared in the Hong Kong Economic Journal on Oct. 8.

Translation by Myssie You

[Chinese version中文版]

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MY/JP/RA

head of private banking and trust services at Hang Seng Bank

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