China-Powered Global Stock Market Mania Risks Creating New Bubble

A worldwide stock market surge fueled by China and improving economic indicators risks creating a bubble, analysts have warned. The Chinese stock market has jumped 14% in the past week, helping to boost global markets. Improving jobs and sales data have also buoyed stock markets in the U.S. and Europe.

Unfortunately, analysts warn that things could turn ugly soon. The last time the Shanghai Composite climbed vertically, it lost around 45% of its value in a few months. The Shanghai Composite Index closed Monday at 3,332. This marked a 5.7% increase, as low interest rates and bullish investor sentiment fueled the rally.

It had risen 2% on Friday after data showed jobs in the Chinese service sector increased their fastest pace in more than a decade. China’s broader CSI 300 Index has grown 14% in five days, the biggest gain since December 2014.

Data from Europe and the United States are also playing a big role. Eurozone retail sales surged 17.8% in May, compared to an 11.7% decline in April. In the U.S., 4.8 million jobs were added to the economy in June. These factors have ignited a big stock market rally worldwide. Germany’s DAX is up by 1.7% on Monday. The U.K.’s FTSE 100 is up by 1.8%. The S&P 500, Dow Jones, and Nasdaq are rose more than 1% in pre-market futures trading. As Fawad Razaqzada also notes in his note to investors, European “stocks exposed to China such as carmakers and luxury goods were among the leaders.”

Razaqzada is one of several analysts warning that the global stock market rally could end in tears: While some of the optimism certainly makes sense, one could argue the markets may have gotten ahead of themselves given the current situation and many risks facing investors in the months ahead. He notes that the second-quarter reporting season is about to start, and it could bring some terrible news. A waning of pent-up demand is also a negative factor.

Sooner or later, a fuller picture of how the global economy is doing will emerge. It probably won’t be pretty, particularly if the second wave of Covid-19 arrives. Economists have previously warned that recovery from the pandemic will take at least five years. If true, it’s hard to see a China-powered stock market rally lasting.

China-Powered Global Stock Market Mania Risks Creating New Bubble. CCN, Jul 6