Which Way Next for the US Stock Market?

Wall Street continues to rally although there are 3 rather mixed messages in the financial markets at the moment.

The simplest angle is the fact that China has announced that industrial production and retail sales continued to expand during the summer. Retail sales rose over 18% compared with the same period in 2009 whilst industrial production rose by over 13%. In addition to this the CFD markets liked the fact that China’s Premier Wen Jiabao confirmed that the Chinese economy was still in ‘good shape’.

Any concern that the world’s second-largest economy was cooling was put to one side and investors sought assets that do well during growth periods. Not surprisingly miners like Alcoa and AK Steel saw marked gains. Other US industrial blue-chip stocks like Boeing, General Electric and Caterpillar have also risen.

The banking sector has also been in the spotlight and according to IG Markets, “The banking sector won some reprieve after the Basel Committee on Banking Supervision allowed sufficient time for the banks to meet the new regulatory recommendations.

“The committee agreed to give banks 8 years to raise enough capital to meet the new Basel III rules. European powerhouse Germany also received extra concessions making it easier for their domestic banks to meet the new requirements. This was important because their banks tend to be less capitalised than US banks”.

So that’s good news for Chinese growth and good news regarding the not-too-strict banking regulations. However there are still tensions regarding the Chinese currency.

Naturally many countries like to have a weak currency in order help their exporters and overall trade deficit. The problem is that the Japanese Yen and US Dollar are getting rather expensive, particularly when trading Chinese Renminbi.

China has allowed the Renminbi to appreciate to its highest level since the ‘de-pegging’ from the US Dollar in June 2005. In spread trading, the Renminbi is now sitting around the 6.7500 level against the US Dollar. As a result, talk from the US is heating up regarding China’s lack of flexibility in the currency’s appreciation. Timothy Geithner, the US Treasury Secretary, has urged China to allow the Renminbi to appreciate further in the best interest of both China and the US.

Mr Geithner is also due to testify to the House of Representatives on what America should do to further ‘help’ reform on China’s exchange rate policy. One theory is that China will be easing its policies to allow more foreign investment, if so that is likely to put upwards pressure on the Renminbi.

All-in-all China’s continued growth is clearly a positive for the World economy but if the Dollar remains expensive then the USA may not benefit as much as other countries.