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Global Market Wrap-Up - May 12, 2014

Monday, May 12, 2014
By: 
Mark Hanna

5 Themes for the Week

1) Major Divergence Between U.S. Large Cap and Small Cap Indexes - For those who follow markets closely, you may have noticed a peculiar situation developing the past month in the U.S. Large cap indexes such as the Dow Jones Industrial Average and the S&P 500 have held up near yearly highs while the small cap oriented Russell 2000 as of last Thursday was near year lows. Yahoo Finance reported that there is a very unique situation happening in which the Dow Jones is at all time highs while the Russell 2000 is below the 200 day moving average (this is a technical analysis term which simply takes the average price of an index or stock over the preceding 200 sessions and averages it). This has only happened twice before in the past 35 years; 1999 and 2007.

Obviously we all know what happened in 2000 and 2008 but the caveat is the Fed was also tightening money supply in those time frames, whereas most believe only the very first tiny hint of any tightening MIGHT happen in 2015. Others, like Peter Schiff, have stated the Federal Reserve is in such a box there is no way they can tighten monetary policy. So take it for what it is and perhaps these 2 indexes will converge later this year but the last two times we saw such a dichotomy between a large cap and small cap index, a year later markets were substantially worse off.

2) Indian Market at Record High on Elections - The Sensex jumped 2.4% Monday to 23,551 as an opposition party appears to be doing very well in the polls. The Sensex has risen 19% since Sept. 13, when the Bharatiya Janata Party named Narendra Modi as its candidate for prime minister. Prime Minister Manmohan Singh’s Congress party looks set for its worst-ever electoral performance as voters punish the government for graft scandals, Asia’s fastest retail inflation and slowing growth.

“The market seems to have made up its mind that a Modi-led government will come to power,” Aneesh Srivastava, chief investment officer with IDBI Federal Life Insurance Co., said. “There’s an expectation that a change in government will improve economic fundamentals.”

3) Japan's Current Account Surplus Falls to Lowest on Record - Japan has funded the vast majority of its stunning debt internally but with a shrinking current account surplus this may be changing in the years ahead. A surplus in the current account balance generates income that helps Japan’s government manage a national debt, which rose to a record 1,025 trillion yen at the end of December.

The surplus of 789.9 billion yen ($7.74 billion) in the year ended March was the smallest in data back to 1985, the Ministry of Finance said. A slide into sustained deficits in Japan’s widest gauge of trade could make the government more reliant on foreign funding to service the world’s biggest debt burden.  

4) Chinese E-Commerce Giant Alibaba Files for U.S. IPO - Late last week, Chinese Internet giant Alibaba Group filed plans to offer shares in the U.S. in a deal that would value the company at more than $100 billion, in what is expected to be one of the largest stock listings in history. Revenue climbed 57% in the final nine months of last year, and Alibaba kept more than 43 cents of each dollar of revenue as net income. The filing showed the company had 231 million active buyers in 2013. A total of $248 billion was spent on Alibaba's three retail sites in China last year, roughly equivalent to the annual economic output of Finland. That transaction volume, which in the fourth quarter was up 53% from a year earlier, was more than twice as much as was spent on U.S. online retailer Amazon.com, which had roughly $100 billion in transactions,

5) Chinese President Xi Jinping Says Country Must Prepare for a "New Normal" as Growth Slows - Chinese President Xi Jinping said the nation needs to adapt to a “new normal” in the pace of economic growth and remain “cool-minded” amid a slowdown that analysts forecast will lead to the weakest expansion since 1990. Policy makers are trying to keep economic expansion from slipping below Premier Li Keqiang’s 2014 target of about 7.5% while reining in a credit boom that a central bank official said threatens to undermine the financial system. China’s Shanghai Index has dropped 5% this year on concern economic expansion is slowing. China’s total debt is estimated to have surged to 229% of GDP by June 2013 from 160% in 2008.