Monday, April 25, 2022

Morning Note: Xi's Calculation

Global asset markets suffered notably overnight as emerging concerns over the state of the world economy met up with China's unbending zero-Covid policy. Reports have it that Beijing is on the verge of following Shanghai into total lockdown.

With Xi up for appointment to a first-ever-for-a-Chinese-president third term sometime the second half of this year, he's clearly calculating that a show of "strength" against the virus best serves his political purposes -- at least for the moment. I suspect he believes that markets -- via fiscal and monetary intervention -- will be effectively managed back to life as his day of political reckoning nears. Time will tell...

Commodities are taking quite the hit on the above news as well (although, per recent videos, we've been calling for a correction in the space). As you might imagine, an economy the size of China's, with its massive manufacturing complex, going into lockdown is going to play huge havoc with global commodity markets. 

Here's from my latest (yesterday) entry to our internal log:

"I do see the potential for a (ultimately) slower growth backdrop (and thus a slower rate of change for inflation) sparking recession fears and, thus, a potentially serious rally in bonds (read treasuries). This will likely play havoc with our commodities exposure for a while as well. Longer-term, the setup for commodities remains resoundingly bullish."

Treasury bonds are indeed rallying this morning. We added small positions (to treasuries and emerging mkt bonds) last week with the plan to scale in more as/if the above unfolds...

With regard to the action in equities of late, as I continue to point out in the market snapshot videos, our base case is that stocks will explore lower levels as 2022 plays itself out. Which of course, in the long-term scheme of things, is the stuff of opportunity...

Asian equities got pummeled overnight, with all 16 markets we track closing lower.

Europe's a mess as well this morning, with all but 1 of the 19 of the bourses we follow trading down as I type.

US stocks are lower to start the week: Dow down 367 points (1.07%), SP500 down 1.15%, SP500 Equal Weight down 1.56%, Nasdaq 100 down 0.32%, Nasdaq Comp down 0.44%, Russell 2000 down 1.36%.

The VIX sits at 30.13, up 6.81%.

Oil futures are down 5.52%, gold's down 1.85%, silver's down 2.40%, copper futures are down 3.21% and the ag complex (DBA) is down 0.76%.

The 10-year treasury is up (yield down) and the dollar is up 0.40%.

Among our 39 core positions (excluding cash and short-term bond ETF), only 5 -- AMD, treasury bonds, MP Materials, emerging market bonds and Nokia -- are in the green so far this morning. The losers are being led lower by energy companies, carbon credits, base metals futures, base metals miners and Verizon.

As I keep saying, structurally, many things are changing in today's world. Here's sympathy for that notion from Goodhart and Pradhan's thought-provoking book The Great Demographic Reversal:

"...the global backdrop over the next thirty years is going to be nothing like the last thirty. The world was swimming in labour thanks to the demographic tailwinds over the last thirty, but will struggle with the demographic headwinds over the next thirty."

Have a great day!

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