Risk sentiment is broadly buoyant at the end of a week that was at times characterized by lackluster trading and aimless markets in search of a compelling narrative to latch onto.
One of the points we made on at least two occasions (here and here) over the past five days was that for the time being, the dollar and headlines around China’s stimulus efforts would likely be the only discernible drivers if nothing else came along to tip the scales in one direction or another.
When it comes to the nascent “reflation” trade, the direction of the dollar and China’s success or failure in convincing the market that Beijing will resurrect growth and provide ample liquidity are mission critical.
On Friday, at the close of the NPC, Premier Li Keqiang reiterated the party line that China won’t “kitchen sink” it (so to speak) when it comes to stimulus. “An indiscriminate approach may work in the short run but may lead to future problems, thus it’s not a viable option”, he said. Do note that Beijing always parrots that line, or some derivation thereof. And while there’s a solid argument to be made that the bubbly feeling of domestic equities may indeed make policymakers wary of injecting a ton of liquidity, and while authorities are concerned that another across-the-board stimulus effort risks making already dangerous financial imbalances even worse, China will do what it has to do in order to ensure the economy doesn’t crash.
“We won’t let the major economic indicators slide out of their proper range”, Li also said Friday, citing RRR cuts and other targeted measures. He emphasized that Beijing is focused on employment and, notably, said the tax cuts announced last week would take effect from April 1.
Read more on the tax cuts and other policy measures announced at the NPC
With the VAT cuts set to take effect in just weeks, expectations for a rebound (or at least the long-sought “bottoming”) in the world’s second-largest economy are likely to pick up.
The SHCOMP ended the week up 1.75%, rebounding after last Friday’s grievous rout snapped an eight-week win streak.
So, that’s the latest on China’s ongoing efforts to bolster the economy and pretend like a pedal-the-metal stimulus effort isn’t in the cards, even though it’s arguably playing out before our very eyes.
Meanwhile, the dollar is on track for its worst week in quite a while, and that too bolsters risk sentiment (the BBDXY is down 0.6% on the week).
The Aussie got a boost on Friday from China’s stimulus plans and it didn’t hurt that Xinhua ran a series of ostensibly positive headlines on the trade talks. The pound obviously had a good run this week as did the euro.
When it comes to the reflation trade, it certainly helps that crude is sitting at a four-month high, up almost 30% on the year.
Between all of that and a reasonably dovish BoJ (they downgraded their assessment of the economy), equities were broadly supported on Friday.
So, you can parse everything as much as you like (and for those interested in a more nuanced, flows-based take on things, you can check out our coverage of this week’s notes from Nomura’s Charlie McElligott), but a simple way to think about things right now is that expectations for stimulus out of China and a softer dollar is the combination you need if you’re looking for buoyancy in risk assets.
Assuming they can hold gains, European equities are on track for their best week in a month, and US stocks, uninspiring though the action was at times, are up handily on the week.
The question now is how tenable this situation is or, said differently, how durable this rather delicate balance proves to be.
The Trump-Xi summit has of course been pushed out and with the US still “the cleanest dirty shirt” economically, any dollar weakness could prove fleeting – although in the longer term, the greenback appears to have the deck stacked against it between America’s worsening fiscal trajectory and seemingly intractable political turmoil.