SHORT VIEW

Last week, world stock markets staged a brief rally on hopes from China. This week, they have rallied in spite of China.

The welter of new information from Beijing this week is hard to interpret; year-on-year comparisons are tricky thanks to the Chinese new year. But in essence, we have learnt that China now has deflation; that its stimulus package, announced in November, has prompted huge domestic investment; and that both imports and exports have fallen by a quarter over the last year, bringing down the trade deficit.

Stocks in China itself have sold off, with the Shanghai Composite now down about 10 per cent from its recent high. Logic suggests that the fall in the Chinese surplus might help redress global imbalances (excessive Chinese savings combined with excessive US debts). But by reducing China's demand for US securities, it might make it harder for the US to fund its deficit.

This logic does not, however, appear to have moved markets, which instead suggested that investors had a renewed appetite for risk. The dollar did slip a bit, but gold continued its recent decline – having briefly punctured $1,000 per ounce, it has now come back below $900 – while stocks largely held on to Tuesday's gain.

Should US or European stocks have sold off on the Chinese news? Not necessarily. By this week, the S&P 500 had priced in much future bad news.

As of Tuesday, it needed to gain 56.5 per cent just to return to its 200-day moving average, a measure of the long-term trend, which for each day takes the average of the 200 previous days' prices.

The bear market rally from November to early January took the S&P from needing to gain 65.7 per cent to get to this trend line, back up to needing to gain only 26 per cent. So stock prices could rise much more from here without changing the downward trend.