A South Korean canary in the coal mine?
Head of Equity Strategy
Summary: It seems more and more likely that the world is in a state of "false stability” in the wake of forward guidance accommodation from central banks, most notably the Fed, and stimulus from China. Against this backdrop, a downwards trending KOSPI in South Korea, and Uber's inauspicious start, seem ominous developments.
Add to this a likely breakdown in US-China trade deal talks, or as we say a “non-solution outcome”, which meant higher tariffs on midnight into Friday (from 10% to 25%) on $200bn worth of Chinese goods. The two parties seem to have moved to a position where neither of them can now cave in without losing face with their citizens, hence the probability of a ground-breaking deal has gone down.
We see pricing of this across emerging market assets, CNH (now at 6.9000 against the USD) and Asia Pacific equities. With the global economy still slowing it’s not the time to be complacent and the VIX closing at around 16 on Friday is a major puzzle given what is going on in markets. We remain defensive on equities.
Adding to China’s troubles passenger car sales was again weak in April down 18% y/y. In the first four months of the year sales were down 12% compared to the same period last year. In any event, the activity in the Chinese car market is around the lows in the world and Europe during the financial crisis of 2008.
As we have been saying for half a year now this indicator is probably the best coincident indicator on China and it shows that the country is experiencing a recession. Many have argued against that position on the grounds of 6% GDP growth failing to recognise that China does not measure GDP growth as output as developed countries but as input to the economy. But one does not need macro indicators to tell that China’s economy is weak. Investors simply need to look at the government’s behaviour. The amount of stimulus being orchestrated is not done in a booming economy but one in weakness.
As we indicated in our IPO analysis of Uber “Why the Uber IPO is all about network effects” the valuation was priced aggressive and especially against Lyft. In addition we updated our views on Twitter as the pricing date (last Thursday) approached.
First Uber said that demand was strong enough to price shares in the high end of the price range ($44-50 per share) but then settling for $45 on the actually pricing date as sentiment soured as Lyft’s shares continued to make new lows. We were not optimistic on Uber and we were indeed vindicated on Friday with the share price down 7.8% from the peak at $45 which was reached shortly after opening at $42.
Investors are increasingly worried over the spending spree of on-demand ridesharing companies and the biggest risk looming, besides regulation of course, is the business model’s robustness against a recession. Our suspicion is that the business model is not robust but time will tell.
Uber 1-min chart on first day of trading (Friday):
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)