Crossing The Rubicon And Buying The Dips

A scan of the headlines on Friday reveals exactly what you’d expect.

China doesn’t want to “confront” the US. Stable relations, Beijing reminds the world, “serve the interests of all”. The country has no reason to resort to cybertheft when it comes to coronavirus research because the nation is already at an “advanced” stage on its own. Some US claims are “absurd”. Some US officials speak “irresponsibly”.

Strip out the references to the virus and the same headlines would be right at home on any day of the week for the past two years.

Meanwhile, Angela Merkel wants to seal the deal on the €750 billion EU recovery fund. Time is of the essence. There’s room for compromise but failure isn’t an option. Differences between countries are still “very big”. Talks are going to be “tough”. Germany and France are going to work together to push everyone in the “right” direction. And so on.

“It would be really nice if they could manage to do the right thing rather than drag things out yet again”, former trader Richard Breslow wrote, in his daily note. “It seems, like many societal changes, that there is an eventual inevitability of pan-European support for each other — it just has to come of age [and] in a world searching for coherent leadership, this would be a good time”.

It sure would.

Readers seemingly weren’t interested in the EU summit on Thursday (see the linked post above), but I can assure you that this is something you can only safely ignore if a compromise is found and the deal gets done eventually.

There’s nothing particularly exhilarating about documenting arduous negotiations in Brussels, but there will likely be some exhilarating price action if the talks crash and burn. And then you’ll be left to reconstruct the crime scene. European equities still have some catching up to do (top pane) and, arguably, the euro has scope to strengthen, but I’ll leave that discussion to those inclined to have it.

“It is not just another European summit that will be held over the weekend”, SocGen’s Head of Global Asset Allocation, Alain Bokobza, writes. “Although a formal agreement on the EU’s Recovery Fund by Sunday night is unlikely, the political signal already sent is strong enough to be a game changer for Europe, and especially the euro area, in our view”, he adds, noting that “Europe is showing that it can find solutions to its problems with [a] clear political and governance change”.

Translation: This really is a big deal. “Bored with the idea of yet another EU summit? Better stay awake this time”, Bokobza advises.

“Our view is that achieving the necessary unanimity of support behind this fund is unlikely to happen quickly and that the likelihood of a breakthrough at the July 17/18 summit is low”, Rabobank wrote Friday, weighing in and adding the following:

Irrespective of the speed of an agreement, we believe that the odds are clearly tilted in favour of the plan that is approved being notably diluted compared to its current form. We find evidence in support of the notion that the market is likely to be somewhat insensitive to such an outcome and that the key focus will be not so much the scale of funding on offer but rather whether the Rubicon of liability sharing is crossed.

Meanwhile, Chinese stocks rebounded to close the week. Leave it to state media to pivot back to the “healthy” bull market narrative just a day after orchestrating a controlled demolition.

“Chinese securities publications, came right back out this morning extolling the long-term healthy prospects for the market and the constructive benefits to the indexes of the pullback”, Breslow notes, referencing a trio of articles and commentaries.

A piece in China Securities Journal reads: “The A-share market’s recent plunge is a normal adjustment following big gains, and investors shouldn’t be pessimistic”. Sound familiar? It could pass for a CNBC headline. Or a Wall Street Journal story.

“The Chinese financial media is back out attempting to alleviate investor concern after [Thursday’s] sell-off”, AxiCorp’s Stephen Innes remarked. “In a front-page piece, the China Securities Journal told investors not to be pessimistic about the mid- to long-term prospects of the A-share market, The Securities Times carried a similar story [and] in another pump, the Securities Daily said the pullback had left the market healthier and more balanced”. You can clearly see mainland shares’ recent surge in the figure (red line, top pane).

I’ll reserve judgement, other than to say that it’s been a wild couple of weeks. Wild enough that it passes the eyeball test, where that just means you can see shenanigans were afoot just by glancing at a longer-term daily change chart (bottom pane in the figure).

In any event, Friday will likely be tedious. The weekend, it would seem, can’t come fast enough for some folks. But then again, that’s always the case.

Describing the overarching message to retail investors from the Chinese financial media Friday, the above-mentioned Richard Breslow said simply: “In other words, dips are meant to be bought”.

Apparently, America isn’t all that different from China after all.