Lackluster June PMI data and the fact that the latest Sino-US trade truce was short on specifics didn’t stop Chinese equities from staging an impressive relief rally on Monday.
The CSI 300 surged nearly 3% to the highest levels since late April, as traders rejoiced. It’s also entirely possible that the sub-50 reads on both the official and Caixin manufacturing gauges were cause for bullishness as the data underscores the need for more stimulus even as the trade talks resume.
Meanwhile, the yuan rose 0.3% against the dollar. Fear that the dreaded 7-handle will be breached is likely to recede – at least in the near term.
The mainland rally was spearheaded by consumer shares. Rare earth stocks logged steep losses on the session as the truce presumably makes it far less likely that Beijing will resort to a rare earths export ban.
The ChiNext, which jumped a remarkable ~35% in Q1 before careening into a bear market as the trade war intensified anew, had its third-best day since Trump’s infamous May 5 tweets.
Monday’s knee-jerk euphoria comes with all the usual caveats.
It is still not entirely clear what Trump’s “softer” stance on Huawei actually means and, beyond that, the existing tariffs are still in place. A slew of soft PMIs out Monday underscore the depth and seeming intractability of the global manufacturing slump, a situation which suggests the damage that’s already been done won’t easily be repaired.
“While China still appears open to a trade deal, it is unlikely to compromise on sovereignty and reforms that could jeopardize its growth model, and is prepared for the worst should negotiations fail”, BNP wrote Sunday, adding that “as the US presidential election approaches, Trump may be more cautious on moves that could jeopardize the slowing US economy [but] has said he’s in no hurry’ to strike a deal, faces bipartisan pressure to remain tough on China, and appears to sincerely believe that tariffs have been a net positive for the US economy”.
You’ve got to love the incredulity inherent in that last bit. It’s still hard for rational people to accept that anyone would “sincerely believe that tariffs have been a net positive for the US economy”.