Hello Chinese stimulus measures!
The recent global equity rally does look to be running out of steam at the moment. Short positions have been covered, but markets look to be lacking any major stimulus to drive significantly higher. A nasty selloff in European and US markets overnight coupled with an awful Japanese Tankan survey has seen Asian markets suffer a vicious bout of selling today. China’s PMIs were way above market consensus estimates as increasing signs of stimulus are evident in the Chinese economy. Although apart from materials companies, markets were little moved by these strong Chinese figures.
The main concern in the markets appears to be with the US. The Non-Farm Payrolls tonight are important, although few expect the headline jobs numbers to disappoint after the strong ADP numbers. The bigger potential market mover will be hourly earnings, which declined last month, and back-to-back monthly declines could cast asunder market pricing for even one rate hike this year. But the bigger US-related concern for equities is what is shaping up to be another negative earnings season, a scenario that is likely to weigh on markets globally. Consistent negative earnings seasons as we are slated to see in the US have coincided with the previous two recessions in the US.
China
Both the NBS and Caixin manufacturing indices displayed substantial pickups in March. The NBS PMI, which rarely displays much volatility, increased 1.2 points to return to expansionary above-50 territory for the first time since July 2015. This is consistent with the big jump in credit data (CNY disrupted February’s data), fixed-asset investment, fiscal spending and housing starts, all of which indicate stepped-up fiscal stimulus. And as I have argued before, I think the strength of the pickup we are seeing this year is due in no small part to the 19th Party Congress occurring next year. Many leaders are looking for promotions as five of the seven Politburo Standing Committee (PBSC) members are set to retire, creating opportunities for promotion throughout the party and government systems. The 1Q GDP growth for Chongqing, Guizhou and Guangdong are likely to especially benefit from this upswing, with respective Party Secretaries, Sun Zhengcai, Chen Min’er and Hu Chunhua, all top picks to take three of those five vacant positions.
Within the NBS PMI, the huge bounce in Output and New Orders to 52.3 and 51.4, respectively, points to solid future momentum in China’s industrial sector over the coming months. It’s also notable on the chart that every time New Orders have come close to touching the Output number that has been a very reliable indicator of government stimulus. The index of small companies in the NBS surged to 48.1 from a previous 44.4 alongside a bounce to 51.5 for large companies. However, the medium-sized company index has remained largely unchanged for the past three months, which raises some questions about who exactly is getting access to the stimulus capital.
Initially the release did see strong buying in both RIO and BHP, but the general risk-off sentiment seems to be dominating trade today.
SpaceKnow’s Satellite Manufacturing Index (based off satellite images of factory activity) is a lagging indicator, as you can see from the chart, but it is likely to jump above 49 in its next report.
Japan
Today’s Tankan survey managed to disappoint on every line, seeing its worst performance since 2Q 2013 when the Bank of Japan’s Quantitative and Qualitative Easing (QQE) began. Clearly, the bout of yen strength we have seen in 2016 is weighing heavily on Japanese exporters. With the introduction of negative rates in Japan largely being a disaster, the government is really clutching at straws. Prime Minister Shinzo Abe is now proposing giving out “gift certificates” in a variation of Milton Friedman’s stipulated “helicopter drop money”.
The Nikkei did not handle the release well almost losing over 3% today, which could indeed be seen as a nasty portension for global equities heading into US earnings season.
US
The key release from the Non-Farm Payrolls tonight is likely to be US Hourly earnings. Back-to-back monthly declines in earnings would really raise the prospects for a recession in the US. Such a development was not even seen in the depths of the GFC.
Markets look on the verge of having a nasty rollover with another negative US earnings season or big pullback in the oil price looking the most likely potential culprits. A lot of the recent rally appears to have been driven by short covering, so the big concern comes if people decide to start building shorts again. Commodity trading advisors (CTA) or managed futures funds are automated trend following strategies and provide a good gauge of market sentiment. I have put a rolling 21-day beta measure of the HFRX Systematic Diversified CTA Index against the S&P 500. When the beta goes negative, CTA funds are majority short against the S&P, and one can see since mid-Feb CTAs have been covering their shorts and moved into majority longs since the beginning of March. Watch carefully for when the CTAs turn bearish again as that is going to add significant downward market pressure.