Monday, July 6, 2020

Morning Note: Beware, Reattachment Can Be Painful

Last night saw a huge rally in Asian equities -- China and Hong Kong in particular (up nearly 6% and 4% respectively) -- on, well, you guessed it, political and policymaker pumping. 

Last week the PBOC (China's central bank) stated that it wants a "healthy" stock market, sparking a strong July 1st rally. And last night it was the state itself pumping the stock market:
"A front-page editorial in the China Securities Journal on Monday said that fostering a “healthy” bull market after the pandemic is now more important to the economy than ever. Chinese social media exploded with searches for the term “open a stock account,” with bullish sentiment also boosting the yuan."
 Economist Andrew Freris points out the risks:
 "Of course, slashing debt and privatizing inefficient state behemoths are good things. But by hyping the market, the government is essentially urging its people to buy the stocks of companies with very weak—and in some cases possibly fraudulent—fundamentals. Last week’s selloff shows just how fragile China’s stock rally is. When the market finally reverses, it will be Chinese households who have ended up paying for the excesses of the state, once again."
European equities, save for Greece's, are following Asia's lead this morning with most markets up over 1%, U.S. equities the same with the Dow up 353 points, and the S&P and the Nasdaq Comp up 1.4% and 1.8% respectively as I type. 

While risk appears to be all-on in equities the VIX (S&P 500 volatility) is surprisingly higher this morning as well, by a full 1% (the Nasdaq vol index, VXN, is up nearly 4%); suggesting, for the moment anyway, that options traders are fading this morning's rally. 

In other non-confirmatory action, gold is up as well, while oil's trading flat. As for the rest of the commodity complex; silver's up a whopping 2%, industrial metals are catching a nice bid (our newest addition, base metals ETF, is up .75%), while ag is trading mixed (our ag ETF is essentially flat) this morning.

The 10-year US Treasury note, however, is, given this morning's rally in equities, making sense; price down, yield up. 

While I could pull from my "charts that trouble me" file galore this morning to echo the risk to "households", although not just China's, Freris points out, I'll leave it here by simply confirming that the skepticism that I suspect the majority of our readers are feeling toward the latest action in equity markets, is, well, well-founded.

That last sentence said, in a world where the world's governments are willing to weaponize their equity markets against their respective economic woes, not to mention against each other, stock prices can remain detached from economic reality for what can seem like a very long time. History (those charts I alluded to), however, strongly suggests that the reattachment can be most painful... 

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