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China Tanks as Q2 Marches On

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Monday, July 27, 2015

(This is Mark Vickery covering for Sheraz Mian, who is giving an interview this morning.)

Overnight, Chinese markets suffered their deepest drop since 2007 on measures that appear to test the markets’ buoyancy without relying on government buybacks. Questions about the sustainability of Chinese government funds’ ability to stabilize the market cause a pullback in market support. As a result, the Shanghai index dropped 8.5 percent and the Shenzhen was down 7 percent.

Uncertainty: it’s not just for American markets anymore.

Also, industrial profits in China fell 0.3 percent in June following two strong months, and this added pressure to the Chinese selloff. And since peaking in June, the Shanghai and Shenzhen indexes have toppled 30 percent. Closer to home the impact can already be felt: the largest Chinese ETF has slid 3 percent in pre-market trading this morning.

Unlike in the U.S. and other “mature” markets, the Chinese stock market is much smaller than the Chinese economy as a whole. Only 10-20 percent of domestic household wealth is invested in Chinese stocks.

With the recent boom in the Chinese markets, common knowledge had been that government support would continue keeping Chinese stocks strong. However, with recent lowering economic projections, this test on the stability of the market adds the most amount of uncertainty: can Chinese markets return to growth without relying on the crutch of government investing?

Perhaps these are merely temporary growing pains — things might look up in a big way if losses are relatively minimal; there may be lots of opportunity to get into quality Chinese stocks at bargain prices as long as enough investors believe the Chinese economy — while no longer as robust as it once was — can subsist without major government intervention.

In other news, a major shakeup in the generic pharma world: Teva (TEVA - Free Report) , which had expressed interest in buying out generics maker Mylan (MYL - Free Report) , has changed course and now looks to purchase Allergan’s (AGN - Free Report) generics business for $40.5 billion. This has sent shares of Mylan down nearly 13 percent in pre-market trading, while Teva shares are up 14 percent and Allergan sees a 7 percent rise in stock value this morning.

Finally, Q2 earnings season marches on this morning, with Norfolk Southern (NSC - Free Report) reporting before the opening bell and homebuilder AvalonBay (AVB - Free Report) and insurance majors like PartnerRe reporting in the after-market. To see a full analysis, check out Sheraz Mian’s Earnings Preview here.

Mark Vickery
Senior Editor

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