Chinese growth story by:
Stocks – China alters the odds
The Chinese growth and stock market revival has been at the forefront of peoples’ minds since the global recovery in financial assets began back in March. As a consequence of this lead the last two week’s sudden correction in Chinese stocks – contrary to western bourses – does suggest that the odds of the next global risk aversion period has returned to balance! This more balanced probability of the next major market move remains countered by: 1) Western bellwether bourses still haven’t experienced any significant technical pattern deterioration and 2) sentiment surveys at neutral readings and 3) macro statistics (see page 3) are still generally supportive. Consequently, the China event suggests that it is now prudent to be tactically bearish and structurally bullish i.e. buying protection appears wise while we wait for market confirmation or disconfirmation.
Bonds – Friendly reallocation ahead
The environment has been hostile to bonds since March when market perceptions turned constructive towards cyclical sensitive markets like stocks, commodities and emerging markets in general and not least augmented by the constant hefty supply of sovereign bonds. As we have been stating in recent weeks the latest yield rise towards the June highs should not blind us to the fact that real bonds yields are soaring with inflation so benign and central bankers having informed us that they will not commit the Japanese mistake of the -90ies, i.e. caution about when to implement their “exit plans”. In this light two interesting observations can be made: 1) strong bond buying has in recent days commenced close to the June yield highs for a second time and 2) the leading recovery story since March has centred on China and Chinese stocks has been falling for two weeks by now. Consequently, we can now observe initial signs that the global risk recovery begins hesitating, and this could easily lure investors to initiate a reallocation back towards bonds… confirmed if yields break below the July lows! Overall, we maintain that the yield direction within expected overall ranges will be guided by the two transient investment themes: 1) “supply fear and economic recovery” and 2) “real yields and central bank responses to protect a fragile global macro economy”.
Commodities – Is oil faltering near $75?
Lots of classic recovery potential in metals have already been attained and oil prices appear unable to maintain – let alone extend – the recent break above $75. While no real pattern deterioration has yet occurred odds for a further substantial commodity recovery now appears to be fast disappearing – not least judged in light of the global Chinese recovery story faltering (stocks falling fast). Commodity exposure is now witnessing increased risk!
Currencies – AUD appears in particular sensitive to risk aversion
Global short USD positions were reduced by 1/3 as of last Tuesday (re. CFTC) and it appears that cyclical sensitive AUD is in a very sensitive position should risk aversion return. And odds of a new risk aversion period appears right now to be rising as the lead story of the global recovery has centred on China and Chinese stocks have now been falling for two weeks. An extreme large speculative long gold position appears a further risk to AUD too. Consequently, it seems that the dominating “US dollar collapse theory” took a hit with the US job report and with the lead recovery story (China) evaporating building strategies with short AUD exposure appears to offer some attractive opportunities.
Shanghai Stock Exchange Composite Index
Baltic Dry Index
yeap, and these boys at trading desks may be of some relevance too!