Mixed Or Muted

Sentiment was mixed or muted (pick your favorite nebulous adjective) to kick off a week with the potential to be interesting — or not.

We tend to hype Fed weeks irrespective of whether any policy shift or guidance tweak is in the offing. Neither is coming at the April meeting. It’ll be a non-event, almost surely.

But there’s no paucity of data this week, and with India’s burgeoning crisis on the radar and the debate around how to fund (or not fund) Joe Biden’s fiscal measures set to heat up in earnest just as he delivers his first address to a joint session of Congress, there are plenty of narratives to spin and rabbit holes to chase down.

Read more: Inflection Points

In the first notable data point of the week, German business confidence printed below estimates. Ifo at 96.8 for April was slightly below the 97.8 consensus was looking for (figure below).

“In manufacturing, the business climate rose to its highest since May 2018. Companies reported greatly improved business,” the survey said, calling demand “still very good.” And yet, the supply chain is an issue. “Fully 45% of companies reported bottlenecks in intermediate products – the highest since 1991,” Ifo noted.

The German services sector was described as “slightly less satisfied with their current situation.”

“Recent signs of optimism have disappeared again,” Ifo president Clemens Fuest remarked. “While the logistics industry is benefiting from the upswing in manufacturing, other industries are still suffering, in particular hospitality and tourism.”

The current assessment gauge rose to 94.1, while Ifo expectations fell to 99.5, well below the 101.2 the market wanted to see (figure below).

The bottom line, from Ifo, is that “both the third wave of infections and bottlenecks… are impeding Germany’s economic recovery.”

The data came on the heels of strong flash PMIs out of Europe late last week, and underscored the pitfalls associated with digging out of a very deep hole.

“Looking beyond possible short-term data distortions, the general outlook for the German economy has clearly improved,” ING wrote. “The vaccination program is finally getting moving and with the prospect of at least 50% of the adult population having had a first jab before the summer, a more substantial reopening of the economy should not be too far away.” the bank went on to say, before cautioning that “new variants of the virus, as currently witnessed in India, could definitely spoil any reopening parties.”

Just after the Ifo data was released, Germany lifted its growth forecast for this year to 3.5% from 3%.

Elsewhere, China is launching a monopoly investigation into Meituan, drawing a bright red line (figuratively and literally) beneath the Party’s ongoing antitrust push, which doubles as a mechanism for Xi to rein in the country’s most powerful tech companies. Among the alleged problems: Forced exclusivity schemes called “pick one of two.”

Meituan said it will cooperate because… well, because what choice does it have? It’s more “pick one of one.” Cooperate or cooperate.

“The interim period could be unnerving for its investors, but we think any penalty Meituan may pay will be commensurate with its smaller operational scale,” Bloomberg Intelligence said Monday, comparing the situation to the $2.8 billion fine for Alibaba. “Under antitrust laws, Meituan could face a penalty of as much as 10% of its revenue if it’s found to have violated regulations,” the same article noted. Alibaba’s fine was around 4% of revenue.

For what it’s worth (and I haven’t talked to anyone who agrees with me on this), the antitrust push combined with Taiwan drama and the distinct possibility that as the world learns more about Xinjiang, capital restrictions of some kind could eventually be imposed, make Chinese equities a non-starter for US investors at this juncture. What happens to your money in the event you wake up one day to a bombshell report suggesting that in addition to the prisons (sorry, “reeducation camps”) in Xinjiang, there’s some “facility” there that US intelligence suspects is being used for more than “reeducation”?

Obviously, that’s pure speculation, but the prospect makes me uncomfortable when it comes to putting money behind Chinese companies, no matter where they’re traded (i.e., A-shares or Hong Kong or ADRs). In some kind of macabre nightmare scenario like that posited above, one of the first responses from the US would likely be a move to ban all investment in China. Just something to think about.