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An early Lunar New Year holiday will make figuring out China's markets and economy especially tough this week
01/23/2012 1:50 pm EST
You can blame some of that (although the Greek debt crisis will certainly help) on the Lunar New Year holiday that started on January 21 and stretches until January 29. The Shanghai stock market is closed for those dates. The Hong Kong stock market is closed from January 23 through January 25.
There’s a good chance that the Luna New Year already distorted data last week, especially in the commodities markets. Companies in China, for example, always stock up on raw materials and on inventory in the weeks before the holiday. For example, China cut gasoline exports to a three-year low in December as companies stockpiled fuel for the big surge in travel during the Lunar New Year festival. The month also saw a big surge in diesel imports for the same reason.
If looking at those figures, you drew any conclusions about the direction of the Chinese economy, the likelihood is that you would have been wrong.
This Lunar New Year distortion may have had an effect on stocks this week as demand for commodities rose during the lead up to the holiday and that may have convinced some investors that commodity prices were rallying because of growth in the Chinese and global economies. That, in turn, may have contributed to the rally in shares of commodity stocks. For example, imports of refined copper surged to a record in December, as consumers of copper built inventories ahead of the holidays. That has contributed to the 11% gain in shares of copper miner Freeport McMoRan Copper & Gold (FCX).
What makes interpreting recent data very difficult is that the Lunar New Year holiday, being, well, lunar, moves around in date from year to year. Last year the New Year fell much later on February 3. That meant that any effects from the Lunar New Year also came much later—in January instead of December. So take news like this with a grain of Lunar New Year salt: This December, when the Lunar New Year falls on January 23, 2012, copper imports climbed 78% from December 2010, when the Lunar New Year fell on February 3, 2011.
Much of that 78% year-to-year surge is because of the shift in timing of the New Year. How much exactly? Take a guess.
The effects of the global commodity markets are magnified this year because the Chinese government has recently moved to increase commodity financing in response to a withdrawal of financing for commodity purchases by European banks looking to shrink their balance sheets to meet regulatory requirements of higher reserve ratios. That means that Chinese financing is even more important to global commodity markets than usual—and that financing is about to be absent or reduced for the holiday week.
In the lead up to the holiday stock market shutdown in the Shanghai and to a lesser degree in Hong Kong stocks rallied as investors sought to get ahead of a widely anticipated reduction in the bank reserve requirement by the People’s Bank of China. Most market analysts and economists expect the bank to make that cut while markets are closed for the holiday and investors bid up stocks in anticipation of an event that they wouldn't be able to trade if the central behaved on schedule.
My estimate is that the week after the holiday will see added volatility as Chinese investors react to whatever the People’s Bank actually does during the break and as commodities markets revisit their conclusions about Chinese demand once traders get data that isn’t influenced by pre-holiday stockpiling.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Freeport McMoRan Copper & Gold as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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