Macro Dragon: China, Starting its Engines...
Global Macro Strategist, Saxo Bank Group
Summary: Macro Dragon = Cross-Asset Daily Views that could cover anything from tactical positioning, to long-term thematic investments, key events & inflection points in the markets, all with the objective of consistent wealth creation overtime.
Today we circle back to check in on china, which has been off most people's radar given Covid-19 entry into Europe & the US, as well as the multi-generational bear market that we are in the midst of.
Macro Dragon: China... Starting Its Engines
Top of Mind…
- Media jammed day folks… KVP will also be on bloomie TV tomorrow at 9am SGT/HKT trying to find segments of sense, amidst all the chaos. See Macro Dragon’s Pocket of Value Starting to Show… where we covered his initial lay of the land after being off the desk for a few weeks. Also note that we are getting that +5% to +10% day in oil today, that we said was likely a tactical development, as the calibration to a floor continues.
- Let’s also add that exceptional times lead to exceptional opportunities, we need to get through to the other side of the currency pockets of forced liquidity & unwinding that is happening out there (be they large quant funds, risk-party players, HFs that have blown up, etc) – before people can start to process the excellent news out there & go back to viewing the worlds through fundamentals & value, and not just price. And yes, this too shall pass. And once again, keep in mind, exceptional times lead to exceptional opportunities – the challenge once the dust has settled will be of optimizing opportunity cost
- With most of the markets attention being on the melt-down in asset classes, the distressed pricing we are seeing & policy responses predominantly from the US & Europe – let’s check back in on China, which seems to be off of most people’s radars…
- US / China relations seem to be getting frostier – with latest tat being around Trump’s use of the “Foreign Virus” or “China Virus” for Covid-19. This is to be expected that in challenging circumstances, it does get tougher to being civil under pressure… empathy flies out the window – how much of this is structural vs. near-term, remains to be seen. Yet a lot of the deep thinkers that KVP respects would suggest that US / CH relations post a Trump presidency (be it one or two terms) is just never going back to where it was – this is something that seems to have support in both political parties. There could potentially be huge structural long term investments around this theme, too early now, yet worth revisiting post US elections (If trump does not delay them) & on the other side of the Covid-19 & bear market storm
- For now some members of US media are is being kicked out & also the conspiracy theory of the US army actually being responsible for the virus leakage (was floating around for months), seems to be getting more traction. China’s rationale on expelling the US journalists, is that they themselves are getting US government actions placing limits on CH government linked media. I.e. This is Tit for Tat.
- Obviously a key risk here is a hypothetical breakdown of the phase one deal, yet knowing trump’s love for the markets – potentially very low probability now, as smacking tariffs on China is likely to cause another -15% to -25% route in the S&P. Still we may get some squeaks around the edges of the deal, delayed payments for US agri products & rightly so given the pullback in economic activity, etc.
- A lot of people may not realize, that after an initial recovery to c. 6.91 lvls, USDCNH is back way above the 7 handle at 7.1152. This is more than likely less about US/CH relations & all about the thirst for US Dollar liquidity & we have the DXY at over 101 & multi-decade to all-time lows against the USD being seen in “pretty much pick your currency”… GBPUSD, AUDUSD, NZDUSD, USDNOK, EURNOK, USDMXN, EURMXN, USDRUB, USDINR, USDBRL, EURMXN,… in fact, the euro at c. 1.09 is holding up very well
- So as a side note, a structurally weaker USD is likely going to be one of the signs that tells us things are starting to calm down, the dollar liquidity is being handled, the forced liquidation are on the tail end, etc.
- China economy wise, we have not yet gotten the full mark-to-market of the complete shutdown that the $16trn economy went through over a +2-4wk (province dependent) extended lunar new year period. We got the Feb PMIs which were obviously abysmal 35.7a 45.0e for mfg. & services was even worse at 29.6a 50.5e.
- Export data was -17.2%a -16.2%e, yet import data actually beat healthy at -4.0%a -16.1%e. Inflation was still high in Fed at 5.2%, yet that is actually lower than lvls to pre Covid-19 where it was 5.4%. Feb PPI was -0.4%a -0.3%e +0.1%p. And whilst new loan figs were low in Feb (kind of hard to take loans when in quarantine), money supply has ticked up across MO, m1 & m2 measures. Retail sales are down -20.5%a, which was way off a very optimistic -4.0%e. IP& FAI also were down -13.5%a -3.0%e & -24.5%a -2.0%e respectively.
- All this should not be a surprise… & with 1Q GDP due on Apr 17, we could be in -10% to -20% pullback in china GDP (should be first contraction since 1989). However its worth noting a few things – China is very much coming back on line – with some provinces saying they are close to 100% of capacity & a lot of companies reporting the same. Its not to say everything is back to normal, but when you are starting from a base of 0, there is only upside.
- So a key metric to watch will be leading indicators, particularly the Mar PMIs which are due on Mar 31st, which again may surprise – to the upside. The key thing to keep in mind, is going to be the divergence in the direction of growth. Yes Chinese GDP eats dirt in 1Q20, but it will structurally tick up for the rest of the year, whilst the US & EZ growth likely ticks down in 2Q & 3Q. China is leading global growth lower, yet it will also lead us out of the global slowdown & recession that the world is likely to experience this year.
- KVP does not anticipate any China stimulus measures similar to during the GFC at c. 14% of then GDP (i.e. it created a lot of baggage & 2nd/3rd derivative consequences that they are still digesting to this day) – but we could see an aggregate along those lines globally from the rest of the world (NZ not messing around with Fiscal at 4% of GDP, Poland talking 9% of GDP, etc). A lot of people focus on TARP & Paulsen’s Bazooka that were the game savers of the GFC… not saying they were not important, but the underlying floor for a case for growth, was really when china massively stepped up for the world with their fiscal announcement & massive demand for commodities & construction. In a perfect world, we’d see dual massive infrastructure funds in the US & the EU.
Good luck to everyone out there, be nimble & position accordingly. Stay healthy & safe
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