Is Chinese Assets Rebound For Real?
Updated: Dec 1, 2022
Last week of Thanksgiving was relatively uneventful in markets that were shaped by two events; the publication of the Fed minutes and the return of Covid related concerns in China.
Fed minutes showed in writing that the Fed now acknowledged risks being skewed to the downside and towards recession for the US economy (“The staff, therefore, continued to judge that the risks to the baseline projection for real activity were skewed to the downside and viewed the possibility that the economy would enter a recession sometime over the next year as almost as likely as the baseline.”)
Logically, the Fed signaled that a slowdown in the pace of increases had become more likely (50bps only in December is now the base case) but also that the terminal rate is likely to be higher than initially expected.
For the bulls and especially the technical bulls, the trend remained their friend (technicians stared last Friday at the fast approaching golden cross formation on the SP500 being just 20 points away), driven by seasonality (the proverbial yearend rally), accelerated share buybacks (before the 1% tax on share buy backs is introduced next year), solidifying expectations that perhaps inflation has peaked in the US, and more importantly, as stated above, a rapidly changing Fed rhetoric about the perspective of the economy (bad news being good news there) and toned down Fed tightening expectations.
Following the FTX disaster (which will likely go into the annals of history in terms of SEC supervisory failure for reasons that will not require a Sherlock Holmes or Hercule Poirot figure out), last week brought news that the investigation widened to crypto lender Genesis which also threatens to enter bankruptcy and plays a key role serving individual investors as the principal operator of one of the largest stable coins (USD coin and Gemini) that pay generous yields to customers entrusting them with certain cryptocurrencies (via the good old trick of hypothecation and rehypothecation). In the meantime, Bankman Fried was still walking free of handcuffs presumably in the Bahamas but with his private jet seen making rounds over Dubai.
In China, equity markets that had witnessed some rebound from their recent lows pulled back some amidst a covid outbreak and renewed lockdowns, notably in Beijing, that were seen hurting the economy again. Investors took fright at news that a couple of thousands additional local infections (bringing the monthly total to 10’000) were spotted in Beijing which brought to the test the government zero covid policy, at the same time as the social acceptance of the consequences of this policy started to run thin, judging from the unrest seen at Foxconn plants where Apple iphone are built with thousands of recently hired employees walking off over concerns of lock downs.
On a more positive note, last week, China’s central bank was seen bringing more direct support to its struggling real estate market by offering cheap loans to banks for them to buy bonds issued by property developers (see China update and Country Garden USD 2024 bonds that rose from near 0% to 60% in a couple of weeks or so).
On the issue of China, there is a very important tug of war developing between the US and…the Netherlands with the former trying to force the hand of the latter to stop exports of ASML chips to China (recent unilateral restrictions imposed by the US go way beyond previous sanctions, essentially trying to cut off China from all Western chip technology) and the latter saying through the Dutch trade minister L. Schreinemacher on Friday the following;
“Well, we are having talks with the US, obviously they have announced their unilateral measures," Schreinemacher told reporters in Brussels. "I cannot really comment on what would be acceptable for the Netherlands.”
It is likely of the utmost importance that the Netherlands and Europe (perhaps and for a change) stand firm on their calls for independence when it comes to impose counterproductive unilateral actions against a key trading partner (China).
Last week brought to light the evidence of the fragilized position of Europe when it comes to handling international trade negotiations. China signed an historic 28-year huge gas deal with Qatar while Germany has been waiting in the wings for weeks without being able to strike such a deal with the same country because Qatar knows only too well how weak a negotiation hand Germany/Europe actually holds, caught between having to cut off with Russian supplies, having to secure long dated US gas deals at top of last August prices and feeling obliged to lecture Qatar on human rights (which honors us but perhaps only so much as other share similar concerns to the same extent which they obviously do not, holding the double language of fostering free trade while giving total precedence to national economic interests).
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Over the past week, the S&P500 rallied 2,1% (-15,3% YTD) while the Nasdaq100 gained 0,7% (-27,9% YTD). The US small cap index gained 1,7% (-16,6% YTD). AAPL dropped -1,7% (-16,6%).
Cboe Volatility Index sold off by -14,3% (19,0% YTD) to 20,5.
The Eurostoxx50 gained 1,1% (-5,2%), underperforming the S&P500 by-0,9%.
Diversified EM equities (VWO) dropped -1,2% (-21,6%), underperforming the S&P500 by-3,2%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,5% (11,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,3% (-6,3%).
10Y US Treasuries rallied -15bps (217bps) to 3,68%. 10Y Bunds dropped -4bps (215bps) to 1,97%. 10Y Italian BTPs dropped -4bps (268bps) to 3,85%, matching Bunds.
US High Yield (HY) Average Spread over Treasuries dropped -15bps (152bps) to 4,35%. US Investment Grade Average OAS dropped -5bps (40bps) to 1,40%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -5bps (44bps) to 0,99%.
Gold gained 0,2% (-4,1%) while Silver rallied 3,8% (-6,7%). Major Gold Mines (GDX) rallied 4,9% (-11,2%).
Goldman Sachs Commodity Index sold off by -3,1% (23,5%, Z-score -2,1). WTI Crude sold off by -6,6% (1,4%, Z-score -2,1).
Overnight in Asia,,,
S&P500 -29 points; Nikkei -0.6%; Hang Seng -2.3%; CSI300 -1.9%
Shares slid overnight with the dollar and treasuries advancing on renewed Chinese covid concerns.
Over the week end, Black Friday showed ecommerce sales topped USD9bn, up 2.3% YoY, to a record suggesting consumers are not yet pulling back their horns but seen borrowing heavily to do so. Profitability of sales were seen in doubt on heavy discounting
The Bahamian government blasted John J. Ray III, in charge of restructuring crypto exchange FTX. “We do not apologize for our ambition for Bahamians to be at the forefront of this exciting innovative sector,” Pinder said. “The Bahamas stands behind its decision to regulate digital assets and related businesses. We stand behind the quality of the regulations that exist.”
Have a nice week ahead!
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
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