The Real Show (I’m Feeling Invincible Right Now’)

“The real show is in Chinese equities, US technology stocks and then gold”, Saxo Bank said Thursday.

That pretty much sums it up. The action is muted everywhere else you look.

Gold is the beneficiary of debasement concerns tied to monetary and fiscal largesse and with real rates negative, there’s no opportunity cost. Of course, it can stop rising (or it can fall), but there’s more than a little excitement about the prospects for a run at $1,900. You can see it in the ETF flows, that’s for sure.

US tech, meanwhile, benefits from investors’ preference for secular growth favorites in a world where the pandemic is expected to perpetuate the “slow-flation” dynamic that’s gripped developed markets for years. Plenty of folks doubt it’s sustainable — some say momentum shares and other equities expressions tethered to the duration infatuation in rates are destined to unwind if the US economy gathers steam and manages to avert a double-dip downturn.

Both gold’s ascent and tech/growth outperformance are indicative of the notion that investors are not, contrary to the narrative, pricing in a “V-shaped” recovery. While gold’s rise has a number of drivers, tech perched at record highs while energy, banks, and various cyclicals lag, is a pure reflection of investors’ skepticism about the robustness of the economic rebound.

As for Chinese equities, mainland shares rose an eighth day Thursday. The truly absurd run has rekindled interest in stories about locals plowing everything they have (which in many cases isn’t much) into A-shares with the government’s blessing.

“There’s no way I can lose”, a 36-year-old tech startup employee who opened her very first trading account earlier this week told Bloomberg. “Right now, I’m feeling invincible”.

Who can blame her? Mainland shares have added $1 trillion in market cap over the past eight days alone.

Something called QuantumCTek Co (they make information security products) rose 924% in its debut on China’s Star board Thursday.

It was the most successful IPO yet on the exchange, which turns all of one-year-old this month. There are no limits on how much a stock can rise in its first five sessions after an IPO.

A twentysomething who spoke to Bloomberg for the same piece linked above explained the rationale behind what he suggested is an imminent decision to employ leverage on top of an existing position in stocks which he described as “pretty much all-in”.

“With leverage, it only makes sense to add it when you can be 100% certain of gains”, he remarked, accidentally describing the entire post-GFC, central bank-backstopped global risk asset rally. He elaborated on the conditions he would need to see before levering up: “That usually happens when the old grannies start rushing in during the mid-to late stage of a rally”.

Commenting on that assessment, Rabobank’s Michael Every quipped that “It’s nice to see young investors with such a keen understanding of the fundamentals of this rally”.

Overnight (and after some confusion around erroneous initial prints), China said PPI deflation eased a bit in June, with factory-gate prices falling “just” 3%. CPI moved higher, but core inflation was a subdued 0.9%.

The marginal improvement in PPI is good news, but there was little evidence in the data to suggest domestic demand is robust. That’s a vexing issue considering external demand is likely to remain depressed for the foreseeable future as the rest of the world digs its way out of the economic slump caused by the pandemic.

Outstanding margin debt on the Shanghai and Shenzhen stock exchanges rose 2.5% to 1.26 trillion yuan through mid-week, according to Bloomberg’s data. Margin debt has been up every session since the recent rally began.

Apparently, Chinese regulators are set to crack down on “illegal margin financing”. Maybe they should have thought about that on Sunday evening before state media started talking up the “healthy cow“.