China In Focus, In More Ways Than One

WHERE WE STAND – Developments in China dominated the bulk of the news flow yesterday, with every man and his dog once again getting all over-excitable about the prospect of further stimulus from the world’s second largest economy.

To recap, the excitement stemmed from a host of politburo announcements, including remarks that the nation’s fiscal stance will be “more proactive” next year, and that the monetary stance will be “moderately loose”, the first official change in monetary stance since 2011. Quite why this latter point came as a surprise to participants is beyond me, given that the PBoC have been chucking the proverbial kitchen sink at the economy for the last 6 months – stable door, meet horse!

In any case, this, and the subsequent 3ish% rally in Chinese stocks, and more than 10% gain in the Nasdaq ‘Golden Dragon’ index, is as good an example as any of the ‘circle of life’ when it comes to China stimulus. It goes something like this:

1. Chinese authorities make some vague musings about additional easing, or stimulus
2. Expectations of said stimulus surge
3. Markets jump
4. Stimulus comes, inevitably failing to meet said expectations
5. Markets dump
6. More musings about stimulus arrive to try and pacify the sell-off

Rinse & repeat.

I see very little reason for this time around to be different, and maintain my longstanding view of not wanting to touch Chinese markets with a 10ft barge pole. Failure to respect property rights, and the mere fact that a ‘politburo’ exists would be reason enough, without having to worry about all the stimulus shenanigans as well.

Those shenanigans, though, were good for some upside in the higher-beta sections of the G10 FX market yesterday, with the Aussie and Kiwi vaulting higher by around 1% apiece, and the GBP also finding some buyers, before running out of steam at the 1.28 figure. The buck, consequently, suffered, with the DXY sliding back under 106.

I’m not particularly concerned, though, by this move, as the case for ‘US exceptionalism’, and subsequent USD upside, remains a strong one. I’d still be a buyer of any USD dips.

Elsewhere, news out of China also had a sizeable impact on the tech sector amid reports that the nation is probing Nvidia for potential breaches of anti-monopoly laws. One wonders if other nations will follow suit here – I’m sure folk in the EU are taking notes, given their love of over-regulating absolutely everything in existence.

In any case, NVDA lost around 3%, a stupendous $100bln in market cap terms, while the broader tech sector also underperformed, as the Nasdaq 100 led Wall St lower. As with the buck, I’d still be a dip buyer of equities, given the continuing bull case of strong earnings growth, solid economic growth, and the ‘Fed put’ backstopping sentiment.

Lastly, in the commodities space, gold showed a few signs of life, awakening from a 2-week long slumber, presumably after weekend reports that China had resumed purchases of the yellow metal after a six month hiatus. Still, spot gold ran out of steam at the 50-day moving average around $2,670/oz – a closing upside break would, naturally, see more buyers enter the fray, though I’m still in ‘wait and see’ mode here, particularly when gold’s rally on Monday came despite Treasuries selling-off across the curve, as the curve itself bear steepened.

LOOK AHEAD – A quiet docket awaits today, as participants continue to look ahead to tomorrow’s all-important US CPI report.

In fact, the docket today has almost nothing of any interest on it, unless US unit labour costs, or a 3-year Treasury auction, ‘float your boat’. If they don’t, another day of sitting on one’s hands awaits, ahead of the week properly getting going tomorrow.