Authored by Charlie McElligott of Nomura
Summary:
Stocks, Commods and EM on overnight lows with the Yuan decline accelerating (CNH to the lowest level in a year) as signs of accelerated easing / outright stimulus confirm the Chinese economic slowdown and credit crunch reality
Our Chinese Economics team highlights said “outright stimulus” shift-indications this week alone (note from last night attached):
- Sharp decline in the Treasury deposit rate
- A call from the chairman of the China Banking and Insurance Regulatory Commission to increase credit supply and significantly cut financing costs of small- and micro-sized enterprises
- A possible new window guidance from the PBoC on using the MLF to encourage banks to increase loan supply and buy high-yield bonds, averting bond defaults
The cumulative move in offshore deliverable CNY (USDCNH) over the past 30 sessions is 6.6%, a 5 standard-deviation event across all returns over the past 10 years and now significantly larger than the devaluation of August ’15.
The implications of this Chinese “confirmed slowdown”—alongside the ambiguous / “edge-less” “trade war” noise—have driven the recent escalation of “global growth scare” which I have been discussing in my “Downshift” thesis since mid-June.
As experienced in the period following August ’15, the Yuan devaluation has the potential to trigger a global “disinflationary impulse” with stronger US Dollar NEGATIVELY impacting Commodities, and with it, global Fixed-Income, Equities and EM assets.
The cross-asset impacts in the 6 months following the August 11th 2015 devaluation were “beyond profound”—see table below.
All 15 major cross-asset markets studied by Quant-Insight which are “in regime” (“explainable by their macro factors”) have either “Metals & Agri”, “Inflation Expectations” or “Global Growth” as one of their top 3 price-drivers.
Cross-asset sentiment and performance trends have become increasingly “acute” both regionally and globally:
- Asian currencies have continued to decline, with the ADXY -4.2% over the past month alone
- MSCI Asia ex-Japan is -9.0% over the last month
- Bloomberg Industrial Metals Index -17.1% over the past month
- Shanghai Property Index -18.2% over the past month
- Chinese 10Y government bond yields collapsing 60bps since late 4Q17 (4.04 to 3.44 last)
- Significant trend reversal in U.S. Equities “Cyclicals over Defensives” positioning over the past two months, with “Cyc/Def” proxies -7.5%
But therein lies the rub as it pertains to the near-term risks to my “Downshift” call (where I have stated that “now is the time” to begin positioning portfolios more defensively / “up in quality” for late-cycle realities of “QE to QT”): as Chinese financial conditions further deteriorate and market stress worsens, we actually / perversely push CLOSER to the “RISK-ASSET POSITIVE” outcome of escalated PBoC stimulus- and easing- measures
Essentially, we are nearing the pain-point of the “PBoC Put”
The potential here is that “heavy-handed” measures from the PBoC in H2 could near-term...