China europe high yield Markets stocks trade yuan

‘V’ Is For ‘V-Shaped’

Waiting on "a message".

Trade talks between the U.S. and China are “serious”.

Or if that’s not actually true, then at least the market is “serious” about pretending the talks are “serious”.

After three days of meetings in Beijing and all manner of hints from the Trump administration that things are going well, markets have seemingly convinced themselves that concrete progress has been made and reports out Tuesday evening that Trump is anxious to strike a quick deal in the interest of rescuing the U.S. stock market appear to be fueling further optimism.

Hu Xijin, editor-in-chief of Chinese state-run newspaper Global Times, tweeted on Wednesday that the U.S. and China will release a simultaneous “message” tomorrow. Trade talks, Hu said, were “conducted in a pleasant and candid atmosphere”.

Well, “candidly”, markets aren’t waiting around on confirmation of concrete progress. Between the December payrolls report and Jerome Powell’s Friday comments in Atlanta, folks are pricing in a V-shaped recovery across assets and that, generally speaking, is probably a bit too optimistic.

The Hang Seng China Enterprise Index is riding a five-session win streak and is now back to levels last seen in early December, for instance.



Helping matters for Chinese shares are further signs that Beijing is prepared to pull various and sundry easing levers in the interest of shoring up markets and sentiment. Overnight, sources said China’s Finance Ministry is all set to float a deficit target of 2.8% this year, versus 2018’s 2.6% target. The new target represents a less expansionary stance than hoped for (considering China’s commitment to “proactive” fiscal policy), but the final number may change and it does represent at least a small nod to stimulus. Also on Wednesday, CCTV said more tax cuts are coming in the form of a reduction in the tax burden for small and micro businesses. That’s according to a State Council meeting chaired by Premier Li Keqiang. And then there’s the RRR cut, which is likely to be the first of several this year.

All of that is stoking optimism even as signs of economic deceleration continue to materialize, with the latest bad news being confirmation that car sales in China posted their first annual loss in more than twenty years in 2018, when auto sales fell 6%, according to the China Passenger Car Association, out Wednesday.

In any event, hopes of Chinese stimulus are adding to the risk-on mood and, again, markets are getting pretty ambitious in terms of pricing in a benign recovery from last year’s doldrums. Here’s a look at the offshore yuan and the MSCI EM FX index which are both sitting at multi-month highs after recent rallies.



In Europe, trade-sensitive sectors are on an absolute tear in the new year, suggesting rampant optimism despite dour data including signs of a recessionary industrial slump in Germany.



The reflation narrative is suddenly back with a vengeance thanks in no small part to crude, which is rallying hard.



You can always trot out something to justify an oil rally (or an oil collapse) so we’ll let you write your own script to explain nine gains in ten sessions for WTI, which is now >$50.



That’s fuel on the fire (figuratively and literally I guess) for U.S. high yield, where spreads have come in a truly remarkable ~80bps in three days, a rally the likes of which the market has rarely seen, suggesting that either ETF activity, liquidity or something else is contributing – it’s hard to imagine that what you see in the following chart is predicated solely on one jobs report, Jerome Powell and oil.



And as for U.S. stocks, well, futures were up ~11% from the December 26 overnight lows (i.e., after the Christmas Eve massacre and before the best cash session since 2009) betraying rampant optimism about the prospects for a V-shaped recovery.



Not to put too fine a point on it, but this all looks overdone in the same way that the December hand-wringing seemed overwrought. The U.S. government shutdown is set to drag on after Tuesday night’s farcical Oval Office address turned out to be nothing more than Trump treating America to horror stories about immigrants murdering people. Last week’s ISM manufacturing print suggests the worst is far from over for the U.S. economy. And Apple wasn’t the first and wont’ be the last to issue underwhelming guidance.

But hey, I guess we should all wait for the “message” that’s purportedly coming from Washington and Beijing on Thursday – that’s assuming Trump can summon the self control not to leak it on Twitter.



6 comments on “‘V’ Is For ‘V-Shaped’

  1. Marcia Southwick

    Don’t forget the buyback blackout period, or you can call it a “fraud free window” or you can call it trading without butterfly wings, tightrope walking with no net, etc… But don’t worry, everything’s awesome and bulls are being contrarian and avant garde… what could go wrong?

  2. Can always count on you H to help keep things in perspective.

    Standard news outlets, the internet, newspapers, TV – grateful to have your arguments and insight to help strip away the spin.

    • One thing I continually try to emphasize in this regard is that people should never assume that just because a site or a blog is not part of the “mainstream” media, that it’s “spin” free.

      in fact, most blogs are by definition full of spin, bias and misinformation and there are a couple of market-related blogs that are notorious for shamelessly pushing an agenda.

      what i try to do is bring you a combination of the best fact-based mainstream media reporting paired with my own opinion-based take on things with the latter informed by actual, formal training in political science and finance as opposed to, for instance, some other bloggers who might have worked at a bucket shop or two in their day but have no real credentials other than maybe an undergraduate degree.

      • When a source becomes part of the news like for instance Jeffery Gundlach,WSJ or CNBC it/he takes on the status of an indicator for all of us.. In this fast paced market every indicator has some form of ulterior motive. Feeding ones narcissism, money , power, glory, or Political gain.
        There are few exceptions and sorting it all out makes this a challenge for all of us. As one can see (lately) everyone that commits themselves takes the chance of being dead wrong or having flawed timing more than occasionally. In fact, we are competing against front running CTA’s whom in turn compete against one another
        H. you have said occasionally that you would attempt to be the most balanced news in our inbox.. Thank you are..!! It helps a lot getting honest context to help customize our strategy….

  3. Heis we still like you despite the formal training… This is a good way for you to stay off booze while introducing acamdemicians to financial markets… It’s a needed service… Keep it up

  4. Well, some of us also like you BECAUSE OF your formal training. 🙂
    Plus the incomparable writing style.

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