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Why Are The Capital Markets Softening

08/11/2010

On the morning of Wednesday, August 11, investors woke up to a significantly lower S&P 500. What has stalled the bullish momentum in the second half of 2010?  Suspects include:

Domestic

1. Friday, August 6 - U.S. unemployment report
2. Tuesday, August 10 - FOMC economy downgrade
3. Wednesday, August 11 - the U.S. ten year Treasury touches 2.71%, its lowest level since early April 2009

International

1. Tuesday, August 10 - Bank Of England cuts growth outlook
2. Tuesday, August 10 - China product import data
3. Wednesday, August 11 - Chinese economic data      

CONCLUSION:  "SLOWING" ECONOMIC DATA FROM CHINA HAS STALLED THE BULLISH MOMENTUM.

The capital markets remain highly sensitive to economic data from China, the global growth engine. Several data points over the past few days suggest a "pause" or "softening" in the upward momentum for 2010 Chinese economic data. 

1. Imports - % year on year change from June to July

         >Copper     (157.8%)
         >Aluminum   (68.4%)
         >Crude Oil    (74.3%)
         >Refined Oil  (30.5%)
         >Iron Ore        (6.2%)
         >Steel            (8.7%)

2. Industrial Production  +13.4% from a year earlier; however, the slowest growth in 11 months

3. Retail Sales  +17.9% from a year earlier, below +18.5% consensus and the previous month's +18.3%

4. Fixed Asset Investment  +24.9% from a year earlier, below +25.3% consensus and the previous month's +25.5%

5. CPI Inflation  +3.3% from a year earlier; previous month was +2.9%; inflation uptick

6. M2 Growth  +17.6% from a year earlier, the slowest growth in 20 months, previous month was +18.5%

7. Loan Growth  new loans for July were 532.8 billion yuan versus 600 billion estimate and June's 603.4 billion

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.