Monday, 9 May 2016

The Chinese San Andreas Fault.

China has been the bear story that won't start giving. It has been the markets Wiley Coyote in a gravity free environment. It has been hanging in thin air longer than many shorts can remain solvent.

Last week I was sitting on my hands until just after the payroll when a few things not moving brought me in to buy equities. That 'not moving' thing was the price action 20 minutes after the print where the volume of the ‘huge miss on Non Farm Payrolls’ shouting peaked whilst prices had stpped falling. I couldn’t quite see how they were such a dreadful number and even if they were then equities would get a lift from yields falling and more Fed push back. As it happened, the triumvirate of rates, USD and equities all put in reversals and headed back north and we ended the week correcting out some of the previous days' risk off trends.

The one place I have been hurting is in metals, well copper to be precise. Every time I think we are basing I buy, get a bounce, then get crucified and stopped. The belief that commodities have had their spike driven by a sum of Chinese speculation, inflation acceptance, short covering and momentum has been rife and looked blindingly obvious as world supply and demand has not changed THAT dramatically. But being ADHD,  I had to get my adrenalin somewhere and hence kept popping in and out of the S+M dungeon of long copper. "The normal whipping please Miss Copper, but just a quick one as I have to be stopped out in 10 minutes”

So I went into the weekend long of equities and things were looking good. But the weekend has me worried about China. China, where normally I am happy to play risk much as Californians play San Andreas fault risk. Everyone knows it’s overdue a massive shake down, but folk still stay there.

Two Chinese factors hit us over the weekend. The first was the trade data, where the import data points to a slowing consumer demand. This hit commodities like a brick between the eyes and iron continued its falls, knocking off another 7%, and copper fell through previous support. AUD, still reeling from the RBA cut and bias shift took, took a further blow. Chinese stocks took another hit and the SHCOMP is now comfortably back below 3000. That alone would normally be enough to give the Developed Markets the heeby-jeebies, but they have held in with Europe ignoring everything out East and refocusing on relative value and out of date (March) German manufacturing data.

The second Chinese factor may not be seen as much to many, but as I am of the camp believing China will continue to 'credit away' their problems until it all snaps San Andreas Fault like, it appears as an important indicator. The People's Daily article quoting a figure in authority who, rather than staying quiet or denying all the issues that Western analysts have been screaming about, is warning of the same.

BEIJING, May 9 -- China's economy will follow an L-shaped path as downward pressures weigh and new growth momentum has yet to pick up, the People's Daily on Mondayquoted an "authoritative figure" as saying in an exclusive interview.
The country's economic growth, which slowed to its lowest level after the global financial crisis, will not see a U-shaped or a V-shaped rebound, but follow an L-shaped path going forward, the source said.
The People's Daily, flagship newspaper of the ruling Communist Party of China, did not disclose the name of the source, but the term "authoritative figure" is usually used for high-level officials.
The source said China's economic growth has been stable and "within expectations,” but warned of emerging problems such as a real estate bubble, industrial overcapacity, rising non-performing loans, local government debt and financial market risks.
High leverage is the "original sin" that leads to risks in the market for foreign exchange, stocks, bonds, real estate and bank credit, the person was cited as saying.
According to the authoritative figure, the country should make deleveraging a priority, and the "fantasy" of stimulating the economy through monetary easing should be dropped. The country needs to be proactive in dealing with rising bad loans, rather than hiding them.
The economy enjoys huge potential, high resilience and ample leeway, which means its growth will not plunge, even without stimulus policies, the authoritative figure said.
China will avoid a massive stimulus plan to boost growth, which would have a short-term effect but risk long-term damage. Instead, the country has chosen a much harder but more sustainable path of development in pursuing supply-side structural reform, according to the source.
The stock market, foreign exchange market and real estate market should return to their respective functions instead of being used at means of maintaining economic growth, the source said.

If this had been any of your normal Western analysis I would take it with a pinch of timing salt as there is nothing new there. But coming from an authoritarian Chinese source and being splashed on the official communist party newspaper it really does smack of message sending. The first tremor in the quake perhaps?

Yet today’s price action remains a game of two halves. China vs Developed Markets and I don’t know how long the DM post-NFP, Fed policy expectation, induced market rally will sustain itself. Granted, oil put in a rally after the Saudi Oil minister hung up his sandals, but if you are buying on uncertainty you might as well forget it. The power may have moved to a 30yr old prince but considering the amount of advise he is taking on the ARAMCO issue from western banks I doubt they aren’t also involved in advising on oil policy. One thought on ARAMCO IPO re oil prices - It is effectively a long dated oil hedge for consumers. If you buy it you may well want to sell some of the futures hedges you currently hold as the IPO will substitute them. Either way, oil has unwound most of its 3% overnight rally.

The mood out there from those I speak to is pretty neutral. Not necessarily deliberately neutral, more like ‘I don’t know’ neutral.

Even the charts aren’t showing much conviction and that main benchmark the S+P500 could be doing anything as it consolidates… or rolls. I know it’s far to early to call a head and shoulders but it hasn’t confirmed that it isn’t. 2034 area support is pretty powerful as a neck line should we get to 2080 and roll over again.

What do I do? The most sensible thing is to stick in a very tight stop on my equity longs ready for what I think will be a roll over later as post NFP bounces meet Asian woes, even if I would love things to scream higher 'for no apparent reason'


JohnL said...

Bloomberg has some similiar insights. The commodity bounce may be a dead cat.

Leftback said...

SPX 2034-2080 looks like the most obvious range trade we have seen in a while. Short SPY for a 2 - 2.5% pull-back....?

Polemic said...

On a technical outlook yes and I have traded gainst 2081 in smalls but I am not convinced of anyhing much at the moment.

Look at Usd/Jpy .. wasnt that meant to be at 105 by now, or even by last month? The most obvious trades are the ones that hurt people most.