By Michael Every of Rabobank
Mask/On
It’s kabuki time again, folks.
First, re: China.
Markets continue to be buffeted by regulatory actions, with even the likes of giant Tencent conflated with -10% (actually -8.9% on the day, -20.9% YTD). As I underlined yesterday, in order to guess where the sectoral crack-down goes next, one needs to have a firm idea of why this is happening. As a contra-example of how to think, intra-day US-traded Chinese edu-tech stocks bounced 10% because algos don’t understand being a “non-profit” means you don’t make any profits. More relevantly, this morning I saw the first equity research note arguing the crackdown does not “in our view, imply a war against capitalism”: the fact this is having to be stated still suggests fat tail risks. Moreover, Mark Mobius states “there is no way a global investor can ignore China” –which is true given contagion spreading to markets that have nothing to do with it– and that the crackdowns are positive because they are good for Chinese SMEs. As such, can we assume Mobius publicly supports breaking-up of US big tech and monopoly/monopsony Fortune-500 firms too, as per the recent US anti-trust executive order?
Chinese media are already floating that the ”National Team” may step in to stop the equity rout. After all, the Politburo meet this week: yes, global capitalists are literally waiting on the Politburo. But if so, Beijing cracks down on firms, making their stock less valuable, and then buys the much-less-valuable stock in order to show the business is viable, and so (indirectly) bails out the foreign capital whose investments they are attacking with the crack down? Would that not demonstrate there is massive intervention risk? Or perhaps that doesn’t matter when it *helps* stocks, and it shows the equity analyst was right – this *is* how modern ‘capitalism’ works.
Offshore CNH has now moved past 6.52, which while small beer is psychologically significant, and will likely be just a first step if we keep seeing crackdowns. More so as China just stated there will be fiscal support in H2 – which for once will not flow to property or tech, etc. So to property-adjacent infrastructure? To public housing – on land local governments could otherwise have auctioned to developers, so widening the fiscal deficit on both the tax and spending side? To households – a welcome rotation towards consumption that never happens, but opposite to the PBOC’s mercantilist working paper on how to respond to collapsing demographics? (As birth rates collapsed again in H1 in many areas, e.g. Henan -17.9% y/y.)
Will this also mean RRR or rate cuts, in the usual Chinese fiscal-monetary kind of way? China bond bulls are happy at that prospect: even stocks may bounce too, if so. (“Non-profit, you say? But, hey, lower rates!”) Yet giant Evergrande is wobbling badly, so is Huarong, and there is no answer as to how they can be bailed out without the moral hazard that leads towards the gigantism now being addressed via these crackdowns; or broken up without a Lehman moment. And as regulatory crackdowns proceed, other firms may join them on that list. As stated, CNY will wobble too – unless, that is, we see a crackdown in that oh-so-freely-traded cross.
Second, re: crypto.
As US politicians and regulators crack their rhetorical whips further, is this just theater?
Relatedly, the surge in Bitcoin to over $40,000 is seen by some as being as linked to developments in China as it is to a mega US company that ‘should be broken up to help SMEs’ teasing, then denying, that it might one day accept crypto as payment. (And did it mean ‘Bezcoin’ not Bitcoin, to build up its parallel economic and financial ecosystem even more?)
Third, re: masks.
The US CDC states vaccinated individuals can spread the Delta variant of Covid – and there is already ample evidence they can catch it.
As such, we are now back to an official CDC indoor mask recommendation for impacted areas of the US, which naturally dampens the whole ‘we beat Covid’ vibe, even if recoded US (and UK, and Israeli) deaths are a fraction of where they were.
Yet taking the CDC at mask value, US 10-year yields went as low as 1.23% Tuesday, and were at 1.25% at time of writing.
Fourth re: the Fed.
Today is of course Fed decision day. With headline inflation at 5.4% y/y and likely to stay sticky for some time, house prices rising rapidly, and consumer confidence beating expectations yesterday, it is hardly the kind of backdrop of deflation, doom and gloom that would suggest the US economy really needs $120bn of QE support a month.
However, coming against the backdrop of market turbulence, a fall in new home sales this week, weak durable goods yesterday, we can probably assume that all talk of QE tapering will be put on hold until at least Jackson Hole at the end of next month.
Even so, the end of next month is hardly an eternity away. With equity markets still around record highs, the issue is how it can justify not tapering indefinitely, even as stopping it would impact on exactly that key we-don’t-look-at-this-honest metric. But we are back to a CDC mask mandate though….If there is one area of kabuki par excellence in the markets, it is the Fed.
