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In the financial battle between communism and capitalism, Wall Street has spent much of the past few years betting on communist China. No more. Markets are now backing the US, positioning for an American economic recovery even as China slows.
This is most obvious in the split between commodities and share prices, with commodities lumbering down while shares continue to soar. But drill down and it shows up in less blunt measures too.
The clearest wager on the US comes from the bond market. The 10-year US Treasury yield has jumped from 1.6 to almost 2 per cent this month, after reassuring payroll figures.
Supporting that was the switch within the stock market. Economically-sensitive cyclical stocks began outperforming the wider US market slightly earlier, and have ended the oddity of the market being led up by the least-risky defensive shares.
Global semiconductor stocks have continued to rise too, reaching levels last seen at the peak of optimism in early 2011 and spring 2012. For years semis moved almost perfectly in line with commodities – and particularly the CRB index of “raw” industrials, most not traded on markets – as both were sensitive to world growth. Semis have carried on up, a positive signal for computer-heavy America. But commodity prices have dropped as Chinese demand slows.
The danger is that the economy is hit by another summer slowdown. Disappointing data have been ignored in the rush to buy into the US. Yesterday weak industrial production and poor manufacturing in the New York region were quickly shrugged off by investors. With expectations high, the danger is that any disappointment on housing, the consumer or jobs could hit the market hard.
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