China's extraordinary decoupling and why you should watch BASF

Chinese equities jump 6.7%

This week is starting with one of the biggest decoupling moves in many years. Chinese mainland equities were up today at one point by 8.3%, ending the session up 6.7%, as the US president extends the trade deal deadline.

With macro data disappointing everywhere and with global leading indicators at their worst since late 2009, it seems as if the trade deal has removed investor focus away from the real issue. The global economy is extremely fragile. Why else would the Fed go from a hawkish view in December to suddenly Vice Chairman Clarida talking about yield caps?

The Fed has recognised the weakness and with the growing supply of US Treasuries due to the expanding fiscal deficit, the Fed wants to tell the market that it will not allow the supply-demand imbalance to cause interest rate volatility.

As we pointed out last week, Chinese sentiment does not seem to be bought to the same degree in Germany and South Korea, markets that have high sensitivity to changing economic activity in China. As long as we are not seeing those two markets confirming the Chinese sentiment we remain cautious on equities. The risk of mean reversion is extremely elevated.