Market Correction - Will it continue?

There has been some good news in the, over night, Chinese market which was expected by many market experts. But some Asian countries and Europe are still down spooked by what happened in our market yesterday. Are we really in a correction? Will this down trend continue?

From the AP:

Asian, European markets drop for 2nd day Chinese stocks bounced back Wednesday after their biggest decline in a decade, but stock markets elsewhere in Asia and Europe fell for a second day amid investor jitters about possible slowdowns in the Chinese and U.S. economies.

Shares in Japan, South Korea, Singapore, Malaysia, India, Australia and the Philippines all tumbled more than 2 percent after Wall Street suffered its worst day since the Sept. 11, 2001, terrorist attacks.

But as the day progressed, several Asian markets trimmed big early losses, and analysts said the sell-off was most likely a temporary correction to cool overheating markets, although they warned that markets would likely remain volatile for awhile.

"We don't need to worry about a big reduction from here, but this correction could continue for the next couple months," said Shinichi Ichikawa, an equity strategist with Credit Suisse First Boston in Tokyo.

In China, the Shanghai Composite Index rose 3.9 percent Wednesday to close at 2,881.07, rebounding from its 8.8 percent plunge Tuesday — its biggest drop in a decade.

Bullish comments in China's state-controlled media appeared to reassure anxious domestic investors, who account for virtually all trading. China will focus on ensuring financial stability and security, the official Xinhua News Agency cited Premier Wen Jiabao as saying in an essay due to be published in Thursday's issue of the Communist Party magazine Qiushi.

Chinese authorities also denied rumors of a 20 percent capital gains tax on stock investments — speculation that had played a role in Tuesday's plunge.

Still, investors dumped stocks across much of Asia Wednesday, partly unnerved by the 3.3 percent drop in the Dow Jones industrial average overnight. Comments Monday from former U.S. Federal Reserve Chairman Alan Greenspan, who said a recession in the U.S. — a huge export market for Asian companies — was "possible" later this year, also worried some investors.

And from Bloomberg:

China's Market Sideshow Turns Into Main Event: William Pesek
Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wasn't exaggerating when he called Tuesday's global slide ``a bloodbath in the equity markets.''

Here, it's impossible to overstate the Chinese and Japanese parts of the equation. China needs to be explored because there's as much hype involved in its outlook as potential; Japan because of the global bubble caused by the so-called yen-carry trade.

First, the China angle. ``Fueling interest in the emerging markets has been China itself,'' said Joseph Quinlan, New York-based chief market strategist at Bank of America Capital Management.

U.S. Investors

That's particularly true of U.S. investors. Over the past two years, Quinlan said, U.S. investors sank just over $10 billion into Chinese equities. The 9.2 percent plunge in the Shanghai and Shenzhen 300 Index on Tuesday came at a time when U.S. investors have never been more exposed to emerging markets.

In 2006, Quinlan said, U.S. purchases of emerging-market equities totaled a record $52.7 billion. That followed a stock- buying record of nearly $39 billion in 2005. In 2006 alone, U.S. purchases of Chinese equities jumped to $5.2 billion from $4.9 billion in 2005.

All this means that on a relative basis, China has become the key emerging market for the U.S. ``To a significant degree, as China goes, so go the emerging-market returns of U.S. investors,'' Quinlan said.

There you have it -- the world's most developed markets are more vulnerable than ever to the policies of officials in Beijing, regulators in Shanghai and companies throughout the most populous nation. Yes, China has vast potential. It boasts 10 percent-plus growth, $1 trillion in currency reserves and 1.3 billion people, many of whom are becoming richer by the day.

Brave New World

Yet it also has a banking system that's still a transmission mechanism to funnel money into politically connected companies, little transparency, negligible press freedom and a central bank that reports to the Communist Party. China censors the Internet, undermining innovation in an economy that badly needs it. It faces worsening pollution and widespread risks of social instability.

So welcome to the brave new world of global finance, one in which hiccups in Shanghai will increasingly shake up markets across the globe and raise prickly questions about how stable the No. 4 economy really is. China's stock market is no longer a side show, but a main event.

My suggestion is that you research before you invest.