Rotation out of India into China not going to last long: ED Yardeni

ED Yardeni, Yardeni Research, says while a 25% increase in a week does not happen very often, the market discounted a lot of the good news and a lot of it probably was short covering. There is probably some rotation out of India and into China but that is not going to last very long because China's problems are structural and a lot of it has to do with a rapidly aging demographic profile.

Given that we are going to have the central bank decisions in focus, there has been a lot of turmoil across the globe that has still not abated with respect to the Middle Eastern tensions. Crude oil prices have oscillated a lot due to that. How are you looking at the setup for the global markets?
ED Yardeni: The Middle East conflict is having an impact on the price of oil and the recent increase in the price of oil reflects that the Middle East conflict is spreading and it is becoming a more direct confrontation between Israel and Iran and that certainly could impact the availability and the price of oil and so that has got everybody jittery, of course.

Meanwhile, in the United States, there was a lot of talk about interest rates being cut aggressively by the Fed, but now people are having second thoughts about that, following the very strong employment number that we had on Friday.


What are your thoughts on this China comeback trade? Most of the money managers are breathing a sigh of relief because China is finally moving up. Some are happy that their contra call is working. Is the China comeback trade the real deal?
ED Yardeni: I do not think so. I agree that a 25% increase in a week does not happen very often and the market really discounted a lot of the good news. A lot of it probably was short covering. We probably are seeing some rotation out of India and into China. But I do not think that is going to last very long because China's problems are structural and a lot of it has to do with their rapidly aging demographic profile.

In addition, they have tried to offset the weakness in consumers by dumping goods in global markets and they are getting some pushback from Europe, from the United States, and other areas of the world. The Europeans responded with some tariffs on their electric vehicles coming out of China. So, the China trade is not going to last very long. The fundamental problems in the property market and underlying demographics are structural and cannot be cured with policy.

What could be the tactical trade for the rest of the year? Could it be long bonds? Could it be long emerging markets or should one just stay on cash?
ED Yardeni: The market is moving towards a more plausible outlook for interest rates, which is at least in the United States and that is that they are probably not going to come down as rapidly as people thought and the bond yield actually has been going up on the perception that the Fed might actually have eased too much on September 18 when they did 50 basis points that they may be overstimulating the economy and that has to be a concern after the strong employment report. So, bonds are going to provide better yields here. But I would not say there is any reason to chase them. Meanwhile, the US stock market broadens.

It has been pretty much focused on the Magnificent Seven, but it is broadening out to the S&P 493. There are lots of other good companies in the S&P 500 that will use the technologies that are made available, like artificial intelligence, to increase productivity. I am not as keen on smallcaps and midcaps in the US. If you continue to have a correction in India, which is probably all it is, I do not think this is more than a correction, it will be a buying opportunity. If interest rates are going to come down as much, anytime soon in the United States, and if oil prices are going to go up, naturally, that is going to weigh on India's stock market.