With the 24/7 pump from mainstream media that everything is awesome (look at record high stocks) – despite President Trump – it's all too easy to ignore collapsing 'hard' data, geopolitical turmoil, and the looming reality that the world's central bankers are taking a distinctly hawkish turn. However, as former fund manager Richard Breslow notes, overnight we just got a big reminder that butterflies' wings are flapping around the world, and no one knows when the chaotic hurricane will follow…
There’s no escaping the fact that the financial world is completely interconnected. Everyday, we say some market was up or down because some other one made a move. In a more direct context, there’s been a lively debate on whether rates can go up in parts of the world and not others. And we’ve pretty much accepted that it will be a global phenomenon, if and when it happens. This morning, I was told that Asian equities were mostly up due to strong economic data from China. And it was good data, so that made sense. But look at the wild ride Chinese equities went on and be reminded that what looks like a hazy, lazy summer Monday is masking a lot of potential volatility out there while markets continue on believing, correctly, that the central bank “puts” are very much still in effect.
Japan was on holiday and there isn’t much news on the calendar. Not a Fed speaker in sight. European inflation data was benign and low. Certainly nothing that will light a fire under the ECB later this week. European and U.S. equities are trading quietly and calmly. Emerging markets are reminding us that there are no problems in the world.
You really have to be amazed at how effortlessly equity volatility in that second largest economy in the world was utterly ignored. It doesn’t fit the script.
After last week’s data and speeches, markets have concluded they have a clear path at least until autumn. The band has been coaxed into playing another set. For now, nothing can go wrong. And if you needed any proof that central bank policy is the ultimate driver of these markets, here you have it.
But can you imagine the hysterics if the U.S. indices had the kind of day their counterparts in China had? No one would be talking about anything else. What was the alleged cause of the sell-off? Tighter regulation and easing of the IPO pipeline. That was one doozy of a reaction. I guess Western investors sure are glad that our regulators are debating how to cut back on all those rules. It’ll keep things bid.
At the end of the day, however, we’d better keep an eye on what’s going on in important markets elsewhere. No matter how much we want to lazily enjoy the interregnum before Jackson Hole. We spend a huge amount of time about the search for the canary that warns about market direction. Well we just heard what may be distinct chirping but the mining stocks went up anyway.
The Shanghai Composite was saved by a diving catch from its 55-day moving average. How well it continues to define the downside should be a meaningful input to decisions about your trading strategy for the next period. Oh, and did I mention, the Australian dollar just made another new high today.
As a reminder, while last night's Chinese macro data surprised to the upside, it appears unsustainable… As Julian Evans-Pritchard, China economist at Capital Economics, noted, the strength seen in the data seems unlikely to last:
"The recent crackdown on financial risks has driven a slowdown in credit growth, which will weigh on the economy during the second half of this year.
"What’s more, the National Financial Work Conference that concluded over the weekend has signaled that further regulatory tightening remains on the horizon."
For the last three months, Chinese data has been disappointing, along with US, as the collapsing credit impulse leaks into reality…
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