The Chinese stimulus package includes loosening of credit restrictions, tax cuts and a massive infrastructure spending program.
While the world is getting used to seeing bailout packages of this size, in China’s case, the headline figure amounts to about a fifth of the country’s GDP. That’s the equivalent of a $2.8 trillion plan in the United States — about 4x the size of the actual $700 billion package. But China’s half-trillion-dollar stimulus package is not as big as it sounds. According to Macquarie Securities, only 1.5 trillion yuan ($219.6 billion) of the fiscal stimulus is truly new, with 2.5 trillion yuan ($366.2 billion) stemming from previously allocated funds. But Beijing, like other governments that have deployed stimulus packages, is in the business of generating confidence as much as anything else.
Following China’s announcement, the Shanghai Composite soared 7.3%. Japan’s Nikkei 225 rallied 5.8% and Hong Kong’s Hang Seng index rose 3.5%. In morning trading, Britain’s FTSE-100 was up 3%. The CAC-40 in France was 3.9% higher and Germany’s DAX was up 3.8%. Oil and other commodities also rallied sharply on the news.
Your basic Global Bull Market Alert strategy is a careful balancing act between maintaining your “core” defensive posture by keeping most of your capital in your currency bets, and gradually increasing your exposure to stock markets — as you have done with the Ultra S&P500 ProShares (SSO) and the iShares MSCI Emerging Markets Index (EEM). Your currency positions will continue to gain from the global cutting of interest rates — such as the Bank of England’s massive 150 basis point cut on Thursday, as well as the European Central Bank’s 50 basis point cut the same day.
As stability and confidence return to global markets, these two ETF positions will soar sharply. At that point, we’ll be looking to generate short-term gains of around 15-20%. Keep an eye open for special alerts that may come during the next week recommending that you lock in your gains in these positions.
Portfolio Update
The Ultra S&P500 ProShares (SSO) rallied sharply early last week, before falling back toward the end of the week. This leveraged position will continue to be volatile, and one in which we’ll be looking to take profits as soon as it moves back to the upside.
The iShares MSCI Emerging Markets Index (EEM) should move up sharply today on the back of the news of the stimulus package from China. This is a position that can easily soar 20% within a matter of a few days, and is also one from which we’ll be looking to lock in short-term gains.
The Market Vectors Double Short Euro ETN (DRR) ended the week flat — though it did rally toward the end of the week on the back of the 50 basis point cut by the European Central Bank (ECB). The trend in global interest rates and European economic growth is down, so I expect this position to continue its upward trend in the coming weeks.
The Direxion Funds, Dollar Bull 2.5x Fund (DXDBX) resumed its upward trend, after dropping slightly early in the week. With global interest rates falling, and global growth slowing, expect this position to gain as the U.S. dollar re-establishes itself as the world’s #1 safe haven currency.
Your short position in the CurrencyShares British Pound Sterling Trust (FXB) gained slightly this week, as the British pound sterling dropped below the $1.57 level. Considering the Bank of England’s 150 point interest rate cut, the British currency held up remarkably well. Nevertheless, I expect the pound to continue to drop in the coming weeks.
The CurrencyShares Japanese Yen Trust (FXY) shot up about 10% this past week as the carry trend continues to unwind. This position is almost a perfect hedge against your position in the iShares MSCI Emerging Markets Index (EEM), so I expect these to continue to move in opposite directions.
P.S. Surging oil and food prices, as well as deteriorating economic confidence, have stoked inflation fears around the world in recent months, leaving volatile markets and jittery private investors in their wake. In times such as these, it’s good to have this forum to discuss key developments and to hear from the best financial minds in the world. I invite you to join me at the 4th Annual World Money Show London, 14-15 November, at the Queen Elizabeth II Conference Centre. Call 800.970.4355 and mention priority code 009613 or visit The World Money Show London to register FREE today!
