Roller Coaster Rides

Lately investors have witnessed a number of roller coaster rides in major markets such as Wall Street and China index. Last week Wall Street had a fair share of the roller coaster rides whereby it fell by close to 200 points last Thursday before rebounding the next day by almost the same quantum. Same old story... fear for inflation and therefore a possible interest rate hike. Higher interest rates could lead to negative impact on corporate profits, higher cost of doing business and worst case scenario, corporate defaults on debts. The fear was triggered by an alarming increase in bond yield, which could make stocks less attractive.

In my opinion, US Federal Reserve is unlikely to increase interest rates in the near future, given the following reasons:
- US economy is still weak albeit the indicators point to a slower growth rather than recession. Higher interest rates will lead to higher cost of doing business, which is something countries want to avoid in the midst of economic slowdown.
- an increase in interest rates will further dampen an already weakened property sector. It will likely cause more bank defaults and this is not what US Government wish to see.

I believe the above scenario should hold as long as there is no drastic changes in the leading indicators and underlying assumptions.

As for China, it's a case of Chinese Government vs local investors in curbing the stocks buying frenzies. The Chinese Government is experimenting with measures to curb the overheating stock market, and resulted in severe seesaw movement in the index caused by panicky investors. However, time and time again China's index recover in the shortest possible span of time. It clearly shows the buying frenzy and over optimisms ain't over yet. With the kind of economic boom China is experiencing, it is perhaps easy to see why over optimisms kick in. It will be interesting to see the Chinese Government's next action plan. Introducing capital gains tax may indeed be one possibility if the situation really gets out of control.