Last week, we saw what market participants call a “monetary bazooka,” fired by the Chinese government to turn around sagging consumer confidence and revert deflation in housing prices.
Most of the measures were highly technical, but here is a simple summary:
Bank lending rates were reduced
The minimum down payment necessary to purchase a home was reduced
Homeowners were authorized to refinance their mortgages at lower market rates than existing rates
State-owned companies were authorized to issue bonds to finance the purchase of stocks
The Chinese Politburo itself announced some of these measures and therefore taken as a whole reflect a change in Xi Jinping’s priorities.
According to Bank of America, short sales of Chinese stocks constituted one of the most crowded positions in the hedge fund industry. With the surprise announcements and government intervention last week, foreigners had to cover shorts while Chinese individual investors stood in broker house lines to keep from missing out the buying frenzy.
Here are some of the market movers:
MCHI Chinese ETF +19.50%
Alibaba (Online Retail) +22%
BYD (Electric Cars) + 16%.
CSI 300 Shangai Stock Exchange +15% (and +5% this Monday morning)
Iron Ore (a primary Chinese import) +12.5%
The Chinese made it clear that the announced monetary measures are a preview of fiscal measures to come. Fiscal measures - deficit spending - have a higher chance of influencing the demand side of the economy while monetary measures tend to affect the supply side. The Chinese economic problem is definitely on the demand side.
We have seen two major macro moves in two consecutive weeks.
Fed delivered a super-size 50 basis point rate cut
Chairman Xi changed course and made pumping the economy a priority
How is our Macro Monitor processing these developments?
Last week, after the Fed cut, the Monitor went “risk-on,” correctly anticipating a rise in the S&P, 0.40% for the week
This week, after the Chinese bazooka, the Monitor continues to flash “risk-on.”.
It is important to note that although Chinese financial assets appreciated wildly with the announcements, the economy is still in the dumps, and the long-term “Macro Factor” stays red while the short-term trend goes green.
Disclaimer: The content of this post reflects only the views of the author and not necessarily those of Armor Capital.