Sentiment took a marked turn for the worse Thursday as a confluence of factors conspired to weigh on risk assets of all sorts.
The Hang Seng Tech Index plunged again, falling another 3% after Beijing said it’s crafting still more regulatory measures, this time aimed at solidifying the rights of drivers working for tech companies and stepping up oversight of live streaming. It didn’t help that Tencent struck a cautious tone, suggesting the industry may soon find itself subject to restrictions on leveraging data to serve ads.
Alibaba fell to a record low in Hong Kong, where the tech gauge is down 45% (!) from its February highs (figure below).
Apparently, the new regulatory nods were viewed as “incremental,” but that doesn’t matter at this point. Investors are terrified. Or despondent. Or fatalistic. Or, as Bloomberg put it Wednesday, at their “breaking point,” especially in the US, where the KraneShares CSI China Internet Fund is down some 60% from its highs earlier this year. As one retail investor (whose first language pretty clearly wasn’t English) put it Thursday on a message board, “So much manipulated.”
Earlier this week, Tencent said revenue rose at the slowest pace in two years on the heels of Beijing’s tech crackdown, which dented the company’s gaming business. “More regulations should be coming in the near future,” company president Martin Lau said. He struck a conciliatory tone, calling the wave of measures “expected because regulation has been quite loose over [the internet] industry considering its size and the importance.” Tencent is down nearly 50% from its highs (figure below).
In July, China’s tsunami of decrees vaporized some $1 trillion (with a “t”) in market value for Chinese shares listed around the globe.
Shifting gears, Toyota plunged some 5% Thursday (figure below) after halting output at its Japanese plants on parts shortages tied to regional COVID outbreaks.
“We plan to make adjustments,” the company said, in a statement which included the schedule for affected facilities. Executives “sincerely apologized for any inconvenience… to our customers and related suppliers.”
The read-through: 360,000 fewer cars will be made in September, as 27 lines in 14 plants are suspended. This is precisely the issue I touched on last week in “Delta Spillovers By The Outdoor Bar.” I’d humbly suggest now might be a good time to re-read that piece.
“Going forward, the company will look at ways of further diversifying its supply chains to not focus on one region and is attempting to find replacement parts from suppliers in other regions,” Purchasing Group Chief Officer Kazunari Kumakura remarked.
Needless to say, that rippled across markets, sending the European autos index sharply lower. The four-day slump exceeded 5% (figure below).
This is evidence to support the contention that the Delta variant is a real concern. COVID isn’t finished with the global economy.
Toyota’s shutdowns are the type of events that market participants don’t want to see in an environment where (nearly) everyone wants to pretend that as long as advanced economies with effective vaccines and high vaccination rates don’t experience a sharp rise in fatalities, the recovery can motor along.
While valid on many fronts, that thesis turns a blind eye to the very same interconnectedness which transformed the pandemic into a fleeting global depression last year.
Plenty more went wrong Thursday, and I’ll address it all shortly, but the latest drama in Chinese tech and the Toyota story clearly deserved separate treatment. Suffice to say headwinds are mounting.
I think that most investors should have an outlook for Covid – direction, timing, magnitude. What is everyone’s?
Happy talk in the market is gone. The world will eventually learn to live with covid and the disease will see effective vaccines/boosters, some herd immunity depending on place and time and more effective treatment if you are lucky enough to live in a developed economy with good health care (remdesivir, monoclonal antibodies and others to come). That said, the economic effects of covid are a good 1 year plus from going away for the world as a whole. This is going to affect things to a greater or lesser extent for awhile. The improvement will come over time but it won’t be linear or very predictable. The virus will continue to mutate. Vaccination rates going up will help but as we can now see it is not a panacea for now.
Given levels of vaccine hesitancy, in the U.S. and elsewhere, I do not think we’ll see anything like herd immunity before the fall/winter season. That’s likely to mean more infections, more hospitalizations, more deaths, more localized lock-downs — all negative for risk assets and the economy in general.
To my mind the new public school year will be the acid test. Full football stadiums and basketball arenas with everyone unmasked and 35-40% still unvaccinated is unlikely to go well. If winter starts out on the wrong foot and the Fed announces a taper, the market could well end the year down.