‘Quite The Perfect Storm’

The angst was palpable Tuesday, even as markets somehow felt more resilient than they should be considering the macro circumstances and a daunting list of headwinds.

In Asia, Japanese stocks notched a seventh consecutive daily decline (figure below), diving more than 2% to cap the worst losing streak in more than two years. At one juncture, shares were down the most since June.

Early last month, when Yoshihide Suga abruptly resigned, shares surged on a somewhat generic bull case centered on the prospect of more fiscal stimulus and the notion that because Suga was unpopular, his exit should be viewed as a positive development.

Now, though, investors are balking at Fumio Kishida’s nods to wealth redistribution. Social media dubbed it “Kishida Shock.” On Monday, after being appointed (a formality), Kishida spoke about a “new type of Japanese capitalism.” “If the fruits of growth aren’t distributed properly, consumption and demand won’t grow,” he remarked.

Suffice to say investors don’t generally care for allusions to “new” versions of capitalism, and it’s not difficult to explain their aversion. The current version is working just fine for the rich, and the rich tend to be those in whose hands financial assets are disproportionately concentrated.

Beyond that, it’s possible markets got ahead of themselves when Suga resigned. Taro Kono was the Japanese public’s favored candidate and as Bloomberg noted, Kishida “has conceded some see him as boring.” The problem for investors, though, is plainly the possibility of a revamped tax regime for investment income and a generalized push towards compelling corporates to lift workers’ pay.

This should be placed in the context of the broader push in advanced economies to retool capitalism and otherwise install new guardrails after the pandemic laid bare just how inequitable many “advanced” societies really are. Kishida wants to expand the Japanese middle class and raise pay for nurses and teachers, among other things.

Of course, Japanese shares are also a victim of circumstance. Global equities are coming off a rough September and the list of headwinds is multiplying. Most obviously, evidence is mounting that Evergrande isn’t “contained.”

Fantasia, a smaller Chinese developer with some $13 billion in liabilities, failed to pay a $205.7 million bond due Monday, and Country Garden Services said a unit of Fantasia failed to repay a $108 million loan. The market knew this was coming (figure below).

Apparently, Citi and Credit Suisse started refusing the company’s notes as collateral over a month ago. (When you lose Credit Suisse.)

News of the Fantasia nonpayment(s) comes as questions continue to swirl around Evergrande, which is attempting to raise cash while juggling payment obligations. A note guaranteed by a subsidiary of the company’s principal onshore unit went unpaid Monday, raising still more concerns about buried land mines.

Meanwhile, the The Hang Seng China Enterprises Index sits at a half-decade low after falling nearly 2.5% so far this week (figure below).

Needless to say, a simple dip-buying strategy hasn’t worked. The gauge, which looks quite a bit like the notoriously beleaguered Hang Seng Tech Index compositionally, is the world’s worst-performing major benchmark.

Speaking of the Hang Seng Tech Index, it hit another fresh “since inception” low Tuesday. In addition to being constantly beset by regulatory concerns out of Beijing, the gauge is now laboring beneath a rout in US tech. As one analyst put it Tuesday, “It’s quite the perfect storm of headwinds at the moment.”

That assessment applies not just to a single index, but to the macro environment more generally. As noted here at the outset, it’s a small miracle the losses aren’t worse.

Finally, note that if things deteriorate further, it’s possible the Fed will be more reluctant than usual to offer verbal support given internal investigations into trading activity by officials.