Trader thoughts - the long and short of it

Markets welcomed back the Chinese from holiday and all the bad news came together at once.

Source: Bloomberg

Blue Monday: That’s not to say the world’s problems, at least as it applies to global markets, can be rooted in China. Frankly, it was a hapless start for the week, by any measure. The build-up of trader fears simply over flowed during yesterday’s Asian session, as China’s markets attempted to digest a whole week of news all at once. Most of these issues sit beyond Chinese borders, with the fundamental issue remaining the prospect of higher global rates. But a truth that is taking come sifting to exhume is to what extent is the activity in China a reflection of a slow-down in the Middle Kingdom’s economy.

Chinese policy: That issue was raised on the back of China’s policy makers announcement of a cut to the Reserve Requirement Ratio. The measure reduces the capital some major banks in China need to hold in reserve – and attempt to boost credit creation within the economy. This tactic runs counter to a broader strategy of deleveraging the Chinese economy, tipping the priorities of policy makers ostensibly from one focusing-on financial stability, to one focusing instead on stimulating growth. Again, stripping back the arguably more significant story of trade-wars and higher global rates, investors seemed to interpret the latest policy intervention as admission: the Chinese economy is cooling, and needs a little boost.

China’s fundamentals: The risk in this situation is to catastrophize: “China is heading for a hard-landing!”. While a firm grasp on the likelihood of such an outcome is difficult to ascertain, owing to the notoriously opaque nature of the Chinese economy, a catastrophic collapse in China’s economy is probably quite remote. The data (assuming it’s veracity, here) coming out of China is still rather strong: growth is set to remain around 6.5 per cent, employment is solid, and prices are stable. The worries centre around some weak trends in business in consumption data, which though not dire and still rather strong, portends some future slack in the economy. PMI figures are the most conspicuous in this regard presently, trending down for the best part of 6 months, but cracks are beginning to emerge data-points in the likes of retail sales and industrial production.

Chinese indices: The uncertainty hurled up by a possibly softer Chinese economy introduced the level of mystery to the very tangible macroeconomic risks of higher global tariffs and spiking global rates. With so much information to consume, investors hit the sell button en masse and smashed Chinese equity indices. Using the benchmark Shanghai Composite as a barometer, Chinese markets lost 3.72 per cent in value throughout yesterday’s Asian session, driving that index just above support at 2700. The bloodletting may well prove challenging to staunch here, and futures markets are pricing another – albeit less severe – day of losses. The general flight of capital is stinging the off-shore Yuan, sending the USD/CNH through support of 6.90, as the PBOC struggles to wrestle control of the currency from a market that clearly thinks it should be lower.

ASX: Given this as the regional macro-economic backdrop, it’s easy to comprehend why the ASX 200 gave up the ghost yesterday. SPI futures aren’t indicating a let up for our market either, indicating another dip at today’s open. Australian shares were squeezed by the numerous pressures compressing equity markets more broadly: investors are backing away from riskier assets, especially high-growth stocks, preferring safer yields in fixed income markets; while worries about tariffs and Chinese growth enervated investors sentiment regarding the future strength of the Australian economy. As such, the materials and energy sectors sank the overall ASX 200, courtesy of a sell-off in commodities prices, resulting in a day where market-breadth was just over 12 percent, and momentum could push the index through 6100 to support at 6060 in the near term.

Italy and the EU: Europe threw at investors its own challenges yesterday, in the form of another flare-up in tensions between the “populist” Italian government and bureaucrats in Brussels. The story revolves this time around comments made by Italian Deputy Prime Minister, Matteo Salvini, in response to criticism from the European Union about Italy’s budget deficit. In short: Salvini put his country’s woes back on the EU and its policymaking, blaming “the politics of austerity”. The fresh barbs pushed the spread on Italian government bonds and German Bunds back around 304bps, and the EUR/USD below the 1.15 handle to shed 0.3 per cent, adding to a day already mired in the global bond rout and equity-market sell-off.

Wall Street: The North American session has closed shortly before penning this paragraph, and to the credit of US markets, the Dow Jones and S&P500 have pared the day’s early losses to finish very modestly higher. The dynamic was no doubt aided by the Columbus Day holiday, which meant US Treasury markets were out of action. Nevertheless, considering the overwhelming dour sentiment established by Asian and European markets, plus the multi-year lows registered by broader emerging markets, a more-or-less steady day for US shares is no mean feat. The gains were led by a clear rotation into defensive, dividend-yielding stocks: consumer staples and communications stocks topped the Dow Jones’ sectoral map, supported in part by another rally in financials stocks from higher global rates.

US Tech: The takeaway from the US trade is once again how big-tech performed, with the NASDAQ stripping 0.67 per cent for the day. The famous FANGs stocks registered a third straight day of losses, driven by a 1.34 per cent fall in Amazon shares, and a 1 per cent loss for Google parent-company Alphabet. The rotation out of high growth stocks – the kind that have pushed US markets to record highs this year – is apparently taking hold, as discount rates increase, and safer-yields are sought-after in the face of higher global bond yields. Although earnings growth is projected to remain strong into the immediate-future for US shares, the lack of appetite for high-growth stocks gives-off the smell of a market that is looking a trifle toppy.

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