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Correction Week: This Time IS Different

FYI | Sep 17 2014

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

By Peter Switzer, Switzer Super Report

Fund managers are still holding a lot of cash because they still believe the correction has to come and this week certainly offers plenty of opportunities for stock markets to test the resolve of investors.

I always think our dollar can be a canary in the coal mine and there certainly has been some squawking action there.

The Oz dollar was 93.7 US cents at the start of last week and it starts this week at 90.7 US cents — that’s a 3-cent slide in a week! And you might have forgotten that our dollar started the year in the 87-cents region. Then, it was China slowdown related.

Also the Yanks had a snow-driven freeze up on its growth that delayed interest rate rise expectations and our dollar went up as the greenback sunk.

My colleagues at the SMH showed it nicely recently and the below serves as a good reminder of how our dollar can move around big time.
 

The week in slow motion

This week there is the Scottish independence vote, the Fed will do its show and tell on Wednesday on the end of QE3 and it could also talk about its interest rate rise plans.

The Scottish play could slug the pound, and rattle some stocks, such as National Bank ((NAB)), which has banking interests in the UK. There is also a fear that if the Scots breakaway, it will encourage other independence movements.

And we have to throw the weak Chinese data over the weekend into the mix. This puts more pressure on our dollar but, more importantly, adds to uncertainty. Markets hate that kind of thing.

In case you missed it, this is how CommSec’s Craig James saw it on Saturday afternoon:

Industrial production rose at a 6.9% annual rate in August, the slowest growth in 5½ years (December 2008) and below forecasts. Retail sales rose at an 11.9% annual rate in August, mildly below forecasts (+12.1%). Real annual growth was estimated at 10.6% – the fastest growth in eight months. And urban investment in the first eight months of 2014 was up 16.5% on a year ago (forecast +16.9%).”

The China story

China is transitioning from a country driven by exports to one that has more reliance on hometown consumption, which is more like a developed economy. This is affecting industrial production, but it might not hurt GDP as much as some expect, though it could reduce the demand for iron ore and coal.

It’s no surprise that experts are talking about a China slowdown but most believe it will still grow at 7.5% for this year and slow to 7% next year. None of this is terribly dramatic, but stock markets around Asia on Monday did not like the news, with our S&P/ASX 200 off 1%.

All that said, the Chinese Government knows growth is a critical KPI so you can expect some stimulation, which will stop the economy falling off a cliff. The critical point for us is that a weaker China brings the dollar down. If it coincides with the Fed saying and doing something that pushed the greenback up, then all those dollar-sensitive stocks I’ve been talking about should continue to do well.

However, the Scottish thing and its market implications are a real head scratcher. I think pound weakness will push our currency up and if Janet Yellen, with the Fed, don’t give any hints about an early rise in interest rates, then our dollar could actually go up on the news. This is my second-worst case scenario for our stock market .

Worst-case scenario

The worst-case scenario would be the Fed spooks the stock market, the Scots scare the foreign exchange market, which then hurts the stock market and this all compounds with some technical charts that point to a sell off.

So by the end of this week, we could see the overdue correction start but will it go all the way to a 10% plus slide, which a correction is defined by?

I suspect not, because the strength of US economic data could make the Fed talk tough enough to scare the market and so dip-buyers would come in after a 5-7% slide and I’d be joining them if they did.

As you can see, this will be an intriguing week. If recent history with geopolitical scares can be relied on, we might not see any correction moves at all. However, there is one big difference. This week’s events are economic and go directly to investors and institutions’ hip pockets and bottom lines.

And these sorts of things can move markets, big time.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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