- Chinese stocks are plunging with US treasuries. Yet no one seems to blame surging US yields for the bane in Chinese stocks.
- Gold’s historical correlation with US yields is breaking down. Safety in gold, and no longer in US treasuries.
- For now, iron ore and oil are more direct bets than stocks on improving Chinese growth. More potent policy shots are needed to resurrect stocks.
- Jackson Hole shows divergence in global central banks and dyssynchronization in global economic cycle. Yield surging to new highs and splitting from gold. A paradigm shift is afoot, but near term the US sell-off is abating.
- The market is well versed with the stamp duty cut and its effects. The sentiment boost from such a cut will be fleeting, but its policy intent should not be unheeded.
- Economic fundamentals, as reflected in the cyclical asset prices, have so far failed to respond to policies as they used to. More needs to be done, and will be.
- SOE developers’ sales still rising strongly, and their stock prices are diverging from those of POEs. Thus, housing demand is probably delayed, not disappearing.
- The momentum in iron ore price is rising, and tends to lead long bond yield and market recovery by one and three months, respectively.
- So far, the market recovery is driven more by valuation than by fundamentals. Policies must deliver. And China’s private sector leverage is similar to that of Japan in 1993. It is a significant turning point that warrants all attentions and resources.
- China’s record trade surplus mirrors the surge in deposits and M2. It is a testament of China’s manufacturing prowess. But such comparative advantage also means that Chinese exports have been the key to cope with the slowdown during the pandemic. The US demand is now being tampered with by the Fed, hampering China’s manufacturing and exports strength. As such, commodities, energy, and Chinese stocks are frail despite China’s reopen.
- Chinese households are overextended during the pandemic, and are not in a strong position to borrow more. This is why lending lags money growth, and “revenge consumption” is fleeting. Further, consumption is a much smaller part of the Chinese economy, and thus the foreign recovery experience won’t easily apply – contrary to consensus belief.
- If the US avoids a recession, Chinese manufacturing and exports will pull through. Bottoming industry profits and recovering confidence both in the US and China are hinting at rising probability. If so, the recovery will take some time to eventuate, and risk assets will perform later. If not, the market will take a dive, but then the PBoC will likely ease further to support the recovery – much like it did in 2014 to 2015. In either scenario, we must take a deep breath, and hold onto our faith a little longer.