China data surprises, But can’t change sentiment

China has just released an excellent set of tier-1 data points, with Industrial Production (+7.50%), Retail Sales (+6.70%), and Fixed Asset Investment (+12.20%), blowing market expectations out of the water. Although the data covered both January and February, the data is all the more impressive as the government had imposed quite vigorous movement restrictions over the Chinese New Year. Unsurprisingly, given the strength of the data, China left if 1-year medium-term lending facility (MLF) unchanged at 2.85% today, although after the rollover, there was a net injection of CNY 100 bio.

That hasn’t helped Chinese stock markets though, which are down sharply again today, after a rout yesterday. There are plenty of storms blowing through China right now, not least the lockdown of Shenzhen yesterday to limit omicron’s spread. Cases are still rising in China and Shanghai is also subject to tactical lockdowns within the city. Fears continue to dog stock markets that lockdowns could spread, which would severely impact China’s growth.

The tech sell-off continues unabated after the Nasdaq suffered disproportionately over, with China ADRs on their knees anyway over sanctions and delisting fears if China starts supporting Russia, either by sanction avoidance or military hardware sales. China’s quandary is weighing on sentiment. China is ideologically aligned with Russia from a geopolitical perspective but makes most of its money by selling goods to the west. It will be interesting to see which talks loudest.

Concerns around further shared prosperity clampdowns, fines and property sector leverage and credit worthiness persist. I have warned previously about trying to catch a falling knife on these fronts, so I won’t repeat myself. Although the data was positive, there does appear to be some concerns about the forward outlook from Beijing. That is most notably manifested in the recent countercyclical adjustments made to the PBOC USD/CNY fixing this week. The last three fixings (including today), have featured a much weaker than expected yuan, pushing USD/CNY up to 6.3750, and USD/CNH to 6.3925. The long bull market on yuan seems to be drawing to a close as China goes down the tried and tested route of making exports cheaper. That will not bode well for other Asian currencies, which also face a Federal Reserve rate hike this week.

Commodities slide on Ukraine hopes

On the Ukraine-Russia front, the continuation of talks has seen carnage in the commodity space as base metal prices and energy prices plunged. Platinum fell by over 15% overnight. Nickel trading reopens on the LME tomorrow I believe, and it will be interesting to see if the mother of all short squeezes abates there as well. Markets are desperately in search of good news and are pricing in that the talks will lead to a negotiated settlement. I really hope that is correct on a personal basis, but I have seen zero concrete progress from them, and Vladimir Putin’s handshake or signature on a document doesn’t inspire me confidence, and I defiantly would accept a cup of tea. If this is a false dawn, the reversal higher in commodity prices is going to be ugly, very ugly.

In the US, markets are suddenly waking up to the fact that the FOMC will hike this week, and likely signal a long series of hikes going forwards. US yields across the curve shifted higher in unison, notably in the long-dated tenors. The process has been aided by a reduction in haven flows as markets price in peak-Ukraine. Those reduced flows into US bonds likely reduced US dollar demand as well, explaining why it held mostly steady even as yields rose.

Stock markets saw a distinct rotation from value to growth, or to cut through the financial market-speak, they sold massively over-priced technology companies and bought companies that make tangible stuff people can touch. This is another reason why China markets, notably Hong Kong, are having a very bad day.

How far this rotation will go, or how far stocks still have to go, will be very dependent on how hawkish the FOMC is on Thursday (Asian time). But behind the FOMC and Ukraine hopes, other forces will remain at work, notably the stagflationary wave caused by the conflict. The Bank of Japan and Japan government officials are clearly saying they have no intention of changing loose monetary policy and are looking at a Ukraine-derived stimulus package. You can be sure that much of Asia will choose the same path, tolerating inflation to keep growth at least unchanged. The sharp divergence in monetary paths across the world signals Asian currency weakness ahead, especially if China has called time on the yuan rally. An environment of price input shocks and declining growth won’t be good for equities either, growth or value.

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