On Sunday, we gently suggested that upbeat PMI data out of China was likely to triumph over all other concerns when it came to stoking risk appetite to start the new week.
Once the Caixin PMI “confirmed” what the official print seemed to be saying about a possible bottoming in the Chinese economy, overseas equities had the green light.
Long story short, it was off to the proverbial races to start Q2, as Chinese equities soared more than 2.5%, while Hong Kong shares logged similarly outsized gains (surging into a bull market in the process).
The ChiNext rose a ridiculous 4% on the session, bringing the gauge of small caps and tech share’s YTD gain to a truly absurd ~40%, while 10-year yields in China jumped 8bps on the day.
“Equities are ‘foaming at the mouth’ to start the week following the weekend release of Chinese Manu PMIs, with both ‘official’ and Caixin reaccelerating into expansionary territory indicating that policy easing begun last year is now beginning to positively impact growth again”, Nomura’s Charlie McElligott writes, before sounding a cautious tone courtesy of his colleague Ting Lu quoted by Charlie as follows:
The rise in the March PMI and incoming activity data could be partly the result of the lunar new year holiday distortion and the anti-pollution campaign. Final demand exports, new home sales and passenger cars remain weak, and could limit the upward momentum of the PMI. Though we believe sentiment has improved and Beijing’s stimulus has been gradually kicking in, we remain cautious in interpreting the 50.5 PMI reading for two reasons.
First, the official PMI has occasionally been poor gauge of growth momentum over the past five years, especially in spring. Second, the jump in new credit in January this year could indicate some restocking activity, as evidenced by the jump in the raw material inventory sub-index (up to 48.4 in March from 46.3 in February). However, real final demand could remain weak as growth in exports, new homes and passenger cars remain in negative territory.
So there’s the cautious take on China.
It’s also worth noting that amid the Chinese PMI euphoria, risk assets ignored an egregious Tankan miss out of Japan (sentiment fell the most in six years) along with further weakness in the European data (core inflation printed just 0.8% in March). Oh, and there was some poor trade data out of South Korea as well.
But none of that matters right now because, as documented extensively over the past two months (most recently over the weekend here), all that matters for the global cycle is China.
Meanwhile, the above-mentioned McElligott reminds you that there are a variety of catalysts that could make April a good month for risk assets. We discussed that on Friday, but he reiterates it on Monday morning. In addition to going back over the fact that April has posted the best average monthly return for the S&P over the past three decades (+1.64%), Charlie gets a little more granular with the following:
The first two weeks of April (dating back to 1994) have shown to be particularly “pro-cyclical” / “reflationary” in nature across seasonal US Equities sectors- and factor- behavior (Sectors: Materials +1.4% on the median over the first 2w of April; Fins +1.2%; Energy +0.8%; Discretionary +0.7%; Factors: Beta L/S +0.5%, Size L/S +0.5%; Cross-Asset: Crude +1.7%).
And don’t forget how under-exposed key investor groups have been to the YTD surge. For McElligott, “perhaps the largest tailwind now for equities is under-positioning from within the Leveraged Fund universe.”
Whatever the case, we’re off and running in Q2 and it looks like folks are demonstrating a propensity to ignore some other key data as long as China and the US are holding up. We’ll see what we get stateside in that regard.