‘It’s Still Bleeding Over’: Strategist Warns On All-Important Chinese Credit Impulse

On Wednesday, Nomura’s Charlie McElligott outlined the case for a “monster” momentum rally in September.

Long story short (and there are some market puns in there), the rationale is down to seasonality and the idea that recent underperformance of consensus hedge fund strategies suggests a snapback.

There’s been a “massive breakdown in equities’ hedge fund performance” versus the S&P since June, he notes, a state of affairs that informs his call for “a mania in U.S. stocks come next month.”


(Nomura, Bloomberg)

On Thursday, McElligott is back, and he begins by detailing how Wednesday marked a return to “normal” – as it were.

“My tactical call to be long U.S. Equities ‘1Y Momentum’ (into the set-up for a big September rally) elicited major client interest / response, as the factor enjoyed a massive +1.7% return on the session–marking the fifth-best single-day return for ‘1Y Momentum’ factor in 2018”, he writes, adding that yesterday’s outperformance in Momentum “was indicative of meaningful ‘performance relief’ for the buyside, with ‘overweights / longs’ outperforming ‘underweights / shorts’ by a meaningful distance.”

In other words, that call is working out great so far. We’ll see how it pans out 30 days from now.

Of course it did come with a caveat, which essentially centers around the notion that between a “QT escalation” and a generalized tightening of financial conditions, October could be dicey. That’s broadly consistent with similar warnings from a number of folks who fear that the market is perhaps underestimating the extent to which this entire thing hinges on abundant liquidity and, relatedly, the Chinese credit impulse.

Remember, credit creation in China is a key piece of the macro puzzle and as Citi’s Matt King recently noted, a slowdown there “is being reflected not only in directly affected variables like Chinese fixed asset investment but also in the rise in global volatility.”


(Bloomberg Economics’ China credit impulse gauge)

This week, there were signs that China is reverting to debt-financed growth in an effort to support the economy amid the trade frictions, but the campaign to squeeze leverage out of the country’s labyrinthine shadow banking complex before it implodes works at cross purposes with the effort to ensure that liquidity remains ample and that credit to the real economy isn’t choked off.

With that in mind, McElligott also delivers an update on the Chinese credit impulse in his Thursday missive. The readily apparent fading is still “bleeding over into global growth proxies” he warns. Here are a series of helpful visuals.


(Nomura, Bloomberg)

Do note the bottom pane there. That’s a reference to the notion that if global growth proxies continue to rollover, that massive short in the 10Y could end up getting squeezed.

That dovetails nicely with something we wrote here last night: “Bad News For That Massive Treasury Short As Goldman Slashes Bond Yield Forecasts“.

We’ll leave it at that.



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