If you were actively trading in the summer of 2015, you probably didn’t get much sleep.
Chinese equity markets were in the midst of a truly epic meltdown as an unwind in multiple backdoor margin channels catalyzed a collapse of the leverage fueled rally that had, over the course of around six months, turned millions of Chinese housewives into leveraged day traders.
And then there was of course the Greek bailout saga and accompanying weekend Brussels headline hockey as Yanis Varoufakis and Wolfgang Schaeuble battled for ideological supremacy and the future of the EU.
Just when we thought it was all over, China devalued the yuan and collapsed global markets.
Things calmed down for a few months and then, in December, China introduced a trade-weighted reference basket for the RMB, setting off another bout of risk-off sentiment that culminated in a truly horrible January. Finally, the Shanghai Accord and a dovish Yellen in March allowed investors to pick themselves up off the ground.
Well, we’ve come a long way (I guess) since the days when China risk was in the driver’s seat in terms of financial conditions and it’s a good thing, because the Fed has enough on its plate without having to worry about whether a wayward PBoC will short circuit the FOMC’s plans to normalize policy.
With all of that in mind, consider the following chart and accompanying color from Goldman.
Global financial markets seem to have bought into the notion that China-related risks will be managed, shrugging off China’s significant bond and FX market volatility in recent months. Substantial capital outflows and CNY depreciation against the USD continued in late 2016 but have not (yet) resulted in substantial tightening in global financial conditions, unlike last year (Exhibit 3). The aforementioned improvement in growth, alongside clearer messages from policymakers (publicly rejecting a large devaluation and holding the trade-weighted renminbi stable since mid-2016) and friendlier global conditions (a more dovish Fed in particular) have all helped.