Bad News (The Good Kind)

“Typical of an advanced carry trade.”

That’s how Nordea Investment’s Sebastien Galy described the “bad news is good news” dynamic which inspired headlines to kick off what, in the US anyway, was a holiday-shortened week.

Something like this: Equities and futures gained as traders priced in an assumed delay in the unveil of the Fed’s taper schedule following a disappointing read on the US labor market.

The risk to that dynamic is always the same. As I put it Friday, “At some point, bad news is just bad news. You want a dovish Fed, but not at the cost of an economy that suddenly stalls altogether.”

For now, there’s no risk of a real downturn, or at least not imminently. With the Fed all but guaranteed to wait until November to roll out a taper schedule and as markets assume hawkish ECB banter is more bark than bite, US futures drifted higher while European stocks looked for new records. Japanese shares extended a rally sparked by Yoshihide Suga’s decision to effectively resign as premier. The Topix hit a 31-year high (figure below).

To be sure, the “peak growth” narrative — clichéd as it most assuredly is — has merit, although not everyone is prepared to embrace it. Or at least not if embracing it means abandoning a constructive outlook on equities.

JPMorgan’s Mislav Matejka said peak activity and liquidity has passed, but recommended investors remain positive on stocks. Above-trend growth is still likely, at least through year-end, the bank said, adding that although Delta is a “material wild card,” the kind of strict lockdowns that plunged the global economy into the abyss in the first half of 2020 aren’t likely this time around. I suppose I’d gently note that we have, in fact, seen multiple instances of strict containment protocols implemented over the past several months. China, Australia and New Zealand come to mind. Not everyone has conceded that “zero COVID” is a lost cause.

If investor sentiment has cooled off compared to the first half of this year, that’s probably a good thing, JPMorgan’s Matejka said. For what it’s worth, BofA’s Bull & Bear indicator is middling (figure below), suggesting sentiment has indeed cooled.

The decline from the 7.7 level hit back in February is “driven by lower bond yields, IG outperforming HY, weak EM components [and] less exuberant global equity inflows,” BofA’s Michael Hartnett said. As a reminder, “less exuberant” just means the pace has slowed. Global equity funds have seen inflows every week this year.

In China, there were more regulatory rumblings. The government will now set the price of after-school tutoring, for example. Institutions offering courses on compulsory education will need to set compensation based on standardized pricing as dictated by local governments, the National Development and Reform Commission said Monday. Any price increases on top of that standard level are capped at 10%. Local governments have until the end of the year to decide on a price schedule.

Separately, Zhang Gong, head of the State Administration for Market Regulation, told a briefing that monopoly risks are rising thanks to the rapid integration of offline services into the virtual sphere. The “disorderly expansion of platform companies” hurts competition, undermines the interests of small companies and hurts consumers, Zhang chided, adding that China “firmly opposes” what he called the “disorderly expansion of capital.”

On the bright side — and this was all markets cared about Monday — Liu He promised Beijing will safeguard the interests of the private sector. During remarks for a digital economy expo, Liu said “The principles and policies for supporting the development of the private economy have not changed… and will not change in the future.”

Someone tell that to Alibaba, Tencent, Didi, Meituan, the entire Chinese EdTech sector and every other firm swept up in Xi’s “common prosperity” push. It would probably be news to them.