Will China crackdowns continue to weigh on markets?
The selling-off of the Chinese broader stock market in reaction to news/rumours of crackdowns seem to be getting shallower
The selling-off of the Chinese broader stock market in reaction to news/rumours of crackdowns seem to be getting shallower, and the bounces from the lows are getting more powerful.
Yesterday’s state media report terming online games as “spiritual opium” sent shares of tech giant Tencent Holdings, which is the leading online gaming platform in China, down by more than 10% in quick order but the broader market indices clawed back to around flat by the end of the trading session.
Unless there are new and more aggressive crackdowns, the more of the same will likely not cause more negative reactions as investors are likely already bracing themselves for the worst.
As markets get used to the new normal, any slightly positive news is likely to trigger a relief rally in the days ahead.
An ESG Unravelling
Installation of new wind farms in Germany are falling off a cliff and China has notably binned the idea. If rich OECD countries with easy monetary and fiscal policy find it challenging to finance the build-out and the economics don’t make sense, we suspect that this entire industry will reverse in time and ESG proponents only have nuclear and carbon capture technology to latch onto. We believe this will be a structural realization and bodes well for two of our biggest investment themes.
There are no notable events for the day ahead. Risk will primarily be driven by Delta variant spread and measures taken by countries to control it. US ADP jobs and Markit PMI data are unlikely to have much of a market impact.
Keep short USD and long NZD, & CNH. The longer that USDCNH remains below 6.50–6.51, the more likely it is to start grinding lower. Strong jobs data helped NZD break above short term resistance at 0.7030–40.
2. Commodities: Uranium & Energy — Stay the course. .
Key risks: Spread of the delta strain and also the rout in Chinese stocks due to clampdowns from the central government are the key drivers of risk sentiment for now.
Equity Index: Long Nasdaq futures. Stay the course.. Stay long and patient. Look to buy dips on approach of support levels at 13950–14000.
Single Stocks: Every dip is a chance to get involved. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Spread of the delta strain, geopolitical worries and China’s crackdown on various sectors will dictate the market risk sentiment for now.
WHAT HAPPENED YESTERDAY
- The U.S. Dollar Index was little changed at 92.03. The Dollar steadied on Tuesday, after having weakened against the Japanese yen and Swiss franc, as questions about slowing U.S. economic growth and the COVID-19 Delta variant challenged risk appetite.
- The Reserve Bank of Australia (RBA) surprised markets on Tuesday by standing its ground on a decision to taper its bond buying programme from September even as a fast-spreading Delta variant wreaks havoc on the economy. RBA kept its cash rate at 0.1% for its eighth straight meeting, in a widely expected move. It reiterated interest rates will not be raised until inflation was sustainably within its 2–3% target band, a goal unlikely to be met before 2024. The RBA also affirmed its decision made in July to trim its purchases of government bonds to A$4 billion (S$4 billion) a week from September from the current weekly pace of A$5 billion, surprising markets betting on higher or steady purchases.
- US 2-year Treasury Bond yield was unchanged at 0.17%. 10-yr yield fell 1 basis point to 1.19%.
- S&P 500 advanced +0.8% on Tuesday and closed at a record high. The Dow Jones Industrial Average kept pace with its own +0.8% gain, followed by more modest gains in the Nasdaq (+0.6%) and Russell 2000 (+0.4%).
- The energy (+1.8%), industrials (+1.4%), health care (+1.4%), and financials (+1.1%) sectors stood atop the leaderboard with gains over 1.0%. Eli Lilly (LLY 255.99, +9.39, +3.8%) supported the health care sector following its mixed earnings report.
- Chinese gaming stocks were hit by regulatory concerns after a state media article likens online games “spiritual opium”. The link to the article was removed within hours but the damage was done.
HEADLINES & MARKET IMPACT
Notable Snippet: A company controlled by the founder of China’s e-commerce giant JD.com Inc (9618.HK) has been granted approval to set up a new cargo airline based in the eastern province of Jiangsu, China’s aviation regulator said on Tuesday.
The setup of a new cargo airline comes as JD.com’s online shopping rival Alibaba Group Holding LTd (9988.HK) has been expanding its fleet. YTO Cargo Airlines, owned by Alibaba-backed YTO Express (6123.HK), is introducing freighters converted from 767 and 777 planes.
THEMATIC CONTEXT: “As we move into an increasingly multi-polar world, the reshoring of supply chains, logistics and manufacturing will be mega projects governments around the world will be working on and this will be funded by unlimited fiscal spending. In addition, domestic costs tend to be more expensive, feeding into our trajectory of high and sustained inflation in time to come.” — 3rd May 2021
“Supply chain issues are not a quick fix. Lots of investments will be required to successfully reshore capacities and build up a sustainable and reliable economic faction with partners. This has to be a concerted effort backed by free flowing fiscal stimulus by countries. We suspect we are entering an inflationary decade in absolute terms and there is little to suggest otherwise. Cash is trash as inflation is a tax on savings.” — 5th July 2021
COMMENTS/IMPACT: We suspect that e-commerce companies with their own vertically integrated supply chains will have a strong moat in a world that is increasingly de-globalized. The value of Infrastructure and Supply Chains will carry a premium for valuations in time.
Notable Snippet: U.S. President Joe Biden on Tuesday urged Republican leaders in Florida and Texas — home to roughly a third of all new U.S. COVID-19 cases — to follow public health guidelines on the pandemic or “get out of the way” as the country struggles to contain the rapid spread of the disease’s Delta variant.
Florida Governor Ron DeSantis has opposed strict COVID-19 restrictions. On Friday, he issued an order blocking mask mandates in the state’s schools. Texas Governor Greg Abbott issued an order last spring that would impose fines for mask mandates.
“Some governors aren’t willing to do the right thing to beat this pandemic, and they should allow businesses and universities who want to do the right thing to be able to do it,” Biden said, without referencing the two men by name.
THEMATIC CONTEXT: “Measures taken by countries on a Macro level will impact already sensitive social sentiment and we suspect that as Delta variant spreads, this will be the worst time for central banks and governments to talk about talking about tightening credit conditions. In fact, we have been banging the table that the entire credit tightening situation is a farce and merely showboating. The time to unveil the actual show is here and we suspect that assets will resume its trajectory in time.” — 19th July 2021
COMMENTS/IMPACT: This is a development to watch. Another surge in cases that lead to reversal of reopening initiatives will dent risk sentiment and give the Federal Reserve pause in their discussions of the start of tapering their bond buying programme.
Notable Snippet: China’s Wuhan city will test its 12 million residents for the coronavirus after confirming its first domestic cases of the highly transmissible Delta variant.
Wuhan, where the virus first emerged in late 2019, had reported no local coronavirus cases since mid-May last year but on Monday authorities confirmed three cases of the Delta variant. The strain has been found in a handful of provinces and big cities including Beijing over the past two weeks.
THEMATIC CONTEXT: “Is this a sign of things to come? We suspect that the Delta variant will prove to be a challenge in the coming weeks, although most developed world countries at this point in time are fighting this from a better vantage point due to vaccine efficacy and better response policies. This is a development to monitor closely and any changes will affect Cyclicals and Energy to a reasonable degree.” — 19th July 2021
“This is a development to watch as China is usually the canary in the coal mine. Their policy response is indicative of how other countries will react to the Delta variant and we will be keeping a close eye. In Singapore (one of the leading benchmarks as well), a heartening development is the progress towards recognizing Covid as an endemic as vaccination rates increase. As a result of vaccines, we suspect that the world is in a much better place this time around to combat the virus and any knee jerk outlier sell offs will present good opportunities to get into long term structural positions.” — 2nd Aug 2021
COMMENTS/IMPACT: China is the canary in the coal mine and we should watch their development with regards to Delta closely.
FX (Shift on 4 Aug 2021)
STOCK INDICES (Shift on 4 Aug 2021)
Phan Vee Leung
CIO & Founder, TrackRecord