Exuberance Running Out Of Steam?

The Shanghai Composite Index has suffered a couple of weeks of steep declines (off 10% in the last month). It's broken through a major support level and could continue to drop further (it has risen dramatically this year however so a correction is no surprise). I mention it as so much of our escape from recession is due to the strength of China who recently became our largest trading partner. This drop in Shanghai has caused a drop in commodity prices and, among other things, a subsequent drop in the US and Australian stock markets. Ours and the global economy is still very fragile and we should all be cognisant that the recent exuberance could turn very quickly. Treasury Secretary Ken Henry made this point very clearly yesterday:

''The Australian economy does look, certainly relative to the rest of the world, very resilient,'' he said. ''But the rest of the world is not out of the woods yet. It is possible that there will be a second shockwave. I have no reason to believe it will be anything like the first shockwave, but there could be a second shockwave.
''That would have implications for future growth. So I think we should be a little cautious about rushing to declare victory just yet.''
Ironically all this talk in the papers about cash rates going up by 2% could scare people into shutting their wallets and delay the rate rises. Sentiment and confidence, as i've mentioned before have a powerful impact on economic activity.

Longer rates have consequently strengthened considerably this morning - 15 points or so around the 3 year mark