We Should Have Just Ordered Chinese.

US equity futures were sharply lower Thursday, pointing to yet another manic session, as underlying market dynamics conspire with coronavirus headlines to create a volatile tape.

Infections are approaching 100,000 globally, and while the situation in South Korea is showing signs of slowly stabilizing, Iran is in dire straits. Schools and universities have been closed through March 20 as the health ministry reported an additional 591 cases, bringing the total in the country to 3,513.

Japan stepped up quarantine measures, Thailand told anyone coming from high-risk countries to self-quarantine and Malaysia banned more travelers from Japan, Italy and Iran. Switzerland reported its first death from the disease in a 74-year-old woman with chronic illnesses. That news appeared to rattle risk assets. Germany’s case total rose by another 87 to 349, while  confirmed infections in Belgium more than doubled.

Investors looking for shelter from the storm have obviously hidden out in bonds, but you’d have done great had you bought A-shares on the horrendous dip when China reopened after the extended Lunar New Year holiday.

In fact, mainland China shares are now perched at two-year highs.

The CSI 300 has risen in three of the last four weeks (and only fell 5% during Wall Street’s worst week since the crisis).

“Seeking to maximize returns, punters have driven stock leverage and daily turnover past 1 trillion yuan ($142 billion), both near four-year highs”, Bloomberg notes, adding that “China’s army of about 160 million retail traders are a formidable force when momentum starts to take off”. (And yes, that is just as hilarious as it sounds, but it’s true.)

Meanwhile, the offshore yuan is coming off its best winning streak since September 2017, while the onshore yuan has erased its losses since the outbreak of the virus.

Of course, some of this is down to central management of the currency and the markets, but it’s being helped along not just by a retail dip-buying frenzy, but by speculation that authorities will unleash a tidal wave of fiscal stimulus.

Meanwhile, as mentioned here on Wednesday, the Fed’s emergency rate cut (and likely follow-up cut at the scheduled meeting this month) gives the PBoC more room to ease without having to worry about yuan depreciation or capital flight. The spread between China’s 10-year yields and USTs is now at the widest in years.

That, even as Chinese government bonds have also rallied. 10-year yields are near the lowest in 18 years.

Of course, all of this comes against a truly dour economic backdrop, as vividly illustrated by February PMIs, the 80% crash in domestic auto sales and recent surveys which suggest China’s SMEs are on the verge of simply folding.

And yet, despite the economic devastation (and all normative considerations aside), the fact that western money managers consistently doubt the resolve of an autocratic regime sitting on more than $3 trillion in FX reserves and determined to prevent social instability come hell, high-epidemic or deep recession, is a continual source of amusement for me.

There may be a day of reckoning, but for right now, Chinese assets have been a bastion of stability in a world gripped by fear of a virus that crawled out of a wet market in China.

Oh, the tragic irony.


 

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2 thoughts on “We Should Have Just Ordered Chinese.

  1. They should know better, maybe they are finally doubting the possible affect. I have know doubt about the resolve of the regime to take scheme up some way to take advantage of the situation. Hell Bush was not an autocrat, and look at the real result of his resolve to invade Iraq (stimulate the economy, get re-elected). Are western money managers doubting the resolve or wanting to finally dig in their heels perhaps let go of the rope as they approach the rim and the badlands that lie below.

  2. Exhibit A on the power of Central Banks.
    H, you write a lot about the different tools that are at the disposal of a central bank, but I am unsure what those are exactly other than adjusting the fund lending rates. What are the limits on what a central bank can do–or at least, what the Fed can do? Can it, for example, simply purchase equities to prop up the market? I had read once that the Bank of Japan created its own index or mutual funds, which it owns 100% of, to prop up the market there, which may or may not be true. Is this something the Fed is permitted to do? Does it do it? Can we expect this to happen the more this crisis continues?

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