Friday, 29 MayHamish Risk | May 29, 2015
A big jolt to the world’s biggest bull market had a multitude of analysts asking what China’s stock market sell off might mean for global markets, and whether this was just a correction or the beginning of something bigger, What seems clear now say some macro strategists, after the muted reaction from most major equity markets, is that China’s equity markets aren’t as correlated as they once might have been. In the dollar bloc, there’s much attention being paid to the potential for more policy accommodation from both the RBA and RBNZ, with two rates cuts priced in for the latter. Meanwhile there’s also been some movement in forecasts for USDJPY being revised higher on the back of recent moves, with the strong dollar theme favoured by almost all major FX strategists.
China market rout Rareview macro
1. China equities; don’t throw bombsFirstly, some scary facts about yesterday’s China stock market rout: Some 170 names in Shanghai touched limit down, while in Shenzhen the number was 250. About 400 names in Shanghai dropped > 9%, while in Shenzhen it was 530. What does this mean for global equity markets? Some participants suggest it could be similar to February 27 2007, when another rout led to a sell off in global markets. Such people are called bomb throwers, says Neil Azous from rareview macro, and they are wrong. In this note, Azous provides the reader with some great context in relation to historical market corrections and market momentum for the SHCOMP, while pointing out some of the key tail winds supporting this market. He also provides some interesting analysis on potential changes in trading behavior between onshore and offshore China equity markets that might be worth picking up on.
Dollar bloc NAB
2. Australia’s troubled economic transitionHaving ridden the wave of the commodities boom, with China as its surfboard, Australia’s economy is in the midst of a difficult transition to a more domestically-orientated economy, says National Australia Bank. This was illustrated by yesterday’s Q1 capex numbers which showed that capital spending in the mining sector is collapsing, and is now forecast to fall at more than twice the rate in 2015-16, than had been previously thought. Meantime, capex in non-mining sectors also seems to be deteriorating. The Reserve Bank of Australia has already cut rates twice in recent months, but further rate cuts may have little impact on the above trends, notes David deGaris and Tapas Strickland from NAB’s economics team. Indeed, policy makers are faced with something of a conundrum when one considers other data, such as employment, which has been rising.
3. The rise of hedged equity and its impact on EuroIn the latest in a series of articles that looks at the channels through which QE is having an impact on FX, Bank of America Merrill Lynch FX strategists, Kamal Sharma and Vadim Iaralov, focus on the impact of ECB QE on Euro, via, what they define as the capital/portfolio flow channel. What’s fascinating about this piece is the light it sheds on the rise of hedged equity strategies and their relative performance versus unhedged equity. The growth of FX hedged strategies has been exponential since the beginning of last year, and BAML provide some excellent analysis on how this is impacting currency markets as equity investors look to play the central bank policy divergence trade.
US equities Deutsche Bank
4. Beware of US equity market complacencyThe S&P 500 range has been a rather dull 3.2% in May, the smallest so far this year, but it continues to grind higher, underpinned by buybacks against investor flows. Deutsche Bank equity strategist, David Bianco, reckons the market has gotten complacent, according to his PE/VIX emotion monitor. Bianco presents a very convincing argument to suggest the high probability of a significant sell off in US equities this summer, based on his analysis of PE ratios, historical market corrections, fundamentals, and global central bank dovishness that creates more risks for US markets, than other core markets.
Grexit Oxford Economics
5. Greeks becoming resigned to GrexitA new analysis by consultancy Oxford Economics suggested there was a 48% chance of Greece being pushed out of the euro over the next two years. While the Greek public are strongly in favour of staying in the euro, they argue, there may be little stomach for renewed austerity. “We think support for the euro is more flimsy than opinion polls suggest,” Oxford Economics said. “The best way to characterise Greek popular opinion is ‘angrily resigned’ to seemingly endless economic misery. There is universal anger over creditor-treatment given previous fiscal effort; and an acceptance that the country is near-bankrupt”.