It’s a big country that’s somewhere near Sweden I think.
No but seriously, people have seemingly forgotten those tense mornings in the dog days of summer 2015 when the authorities in Beijing were forced to suspend trading in some stocks and buy others via the now infamous “national team” as a truly epic unwind in a half-dozen backdoor margin lending channels abruptly burst the country’s equity market miracle.
No sooner had everyone calmed down from that debacle than the PBoC devalued the yuan and threw global markets into turmoil.
After that, all anyone wanted to talk about was China’s controlled deval and the toll that effort was taking on the country’s FX reserves. Then, in December, 2015, the PBoC adopted a trade-weighted reference basket for the RMB, conveying still more depreciation, which in turn conspired with the Fed’s feeble attempt at “liftoff” to send everything into a deflationary death spiral to start 2016.
Fast forward a year to December 2016 and things went a lot smoother, but really, there was a very similar setup. China was attempting to rein in speculation via OMO tightening and the Fed was hiking again, this time into a collapsing Chinese bond market. Fortunately, everyone shrugged off the China troubles.
Well here we are in April and it’s been a blockbuster start to the year for emerging markets, which has more than a few folks wondering if the music is about to stop (see here and here, for instance).
It’s with all of the above in mind that we present the latest from Bloomberg’s Cameron Crise, who notes that if you “want a reason to sell in May, keep an eye on China.”
Keep an Eye on China for a Reason to Sell in May
While things are looking good for global equity investors these days, they would do well to keep an eye out lest they trip over stray bricks from the wall of worry. While markets seem happy to ignore the impending budget showdown in the US, developments in China should remain a source of concern.
- As we approach the end of April, European political risk has ebbed and U.S. earnings growth has been good. Stock prices have reacted accordingly. Yet with the turn of the calendar next week comes the old admonition to “sell in May and go away.”
- Markets have decided to look through the possibility of a government shutdown in the U.S., probably correctly. Yet there are potential headwinds elsewhere that stock investors should note before chasing the market higher in a seasonally difficult period.
- Many observers have noted the steep declines in Chinese industrial commodities, though interpreting this type of price action can be difficult. Commodity speculation in China exists on a scale unknown in developed markets.
- There was a sharp increase in speculation late last year, with coincided with the Q4 rally in industrial metals. Earlier this year, the authorities tightened liquidity conditions, which helped dampen speculative activity in contracts like iron ore. Unsurprisingly, the price declined. Yet open interest has actually increased as the price has fallen, suggesting that some of the decline may indeed be “real.”
- At the same time, the yuan has fallen toward its lows against the CFETS reference basket. While one could perhaps put that down to the vagaries of the dollar’s value against other currencies, I tend to doubt that it’s a coincidence. I generally view the currency as an examplar of “watch what I do, not what I say.” A declining yuan suggests concerns about growth.
- It’s a common belief that China wants to keep the economic balls in the air until after the 19th party Congress in October. That’s probably right, but it doesn’t mean that the authorities won’t shift policy now and again, with possibly unintended consequences.
- There’s been a lot of enthusiasm for emerging markets recently, including from me. But with the MSCI EM index rapidly approaching long-term resistance, even a slight wobble from China could encourage EM investors to take some profits — and provide a catalyst for developed markets to sell in May as well.