The Thrill May Be Gone.

The good mood has seemingly worn off for global equities and just in time for New York to come back online after the holiday.

It’s amusing that markets digested China’s underwhelming activity data (which included the slowest pace of quarterly growth since the crisis) with relative alacrity while the IMF’s warning about the outlook seems to have deep-sixed sentiment. Sure, the China data is “backward looking” and there were signs of stabilization, but IMF “warnings” are a dime a dozen. That doesn’t mean they aren’t accurate or shouldn’t be taken seriously, it’s just to say that this particular update from the Fund seems to be getting more traction in terms of shaping the narrative – that’s likely thanks at least in part to the fact that trade was flagged as one of the biggest concerns and the main antagonist in the trade story (Trump) is erratic and unstable.

News that the US will move ahead with the formal extradition of Huawei’s Meng (currently held hostage in Canada after being kidnapped early last month at the behest of the US just as Trump and Xi were between bites in Buenos Aires), is yet another sign that diplomatic tensions between Washington and Beijing are likely to get worse before they get better – and that’s to say nothing of the increasingly contentious (and dangerous) row between Canada itself and China.

In any event, Asian equities fell on Tuesday amid growth and trade jitters which are getting even more air time than usual thanks to Davos. This was the second worst day of the year for the CSI 300.

(Bloomberg)

Hong Kong shares fell as well. The HSCEI was off by nearly 1%.

(Bloomberg)

The yuan is now squarely on the back foot having fallen for four straight days. The offshore spot is back through 6.81.

(Bloomberg)

And, perhaps most worrisome of all if you’re concerned about financial conditions starting to tighten anew, the dollar is now gunning for a sixth consecutive gain and the eighth winning session in nine.

(Bloomberg)

“Two days in Beijing and Shanghai, with more questions about Chinese economic slowdown than I expected (this is a first for many young FX market participants) and the news that a large US bank is busy telling clients that the dollar is the best of a bad lot in FX-land — higher rates, more scope to react to a slowing global economy”, SocGen’s Kit Juckes wrote on Tuesday. Kit calls that “a fair comment” but his rejoinder is that “the dollar in real effective terms, is already expensive for just that argument and if the global economic slowdown is controlled rather than catastrophic, there’s more reason to look at relative growth rates and relative interest rates than simply to look at absolute numbers –  the current growth and rate differentials are why the dollar’s so expensive.”

In any event, sentiment feels fragile again. It might not take much to tip things in the wrong direction. And what a shame that would be – after all, we’re just now back to levels across global benchmarks where CTAs are starting to cover and volatility has just recently calmed down enough to bring back the vol-targeting crowd.