While Chinese, European, and US stocks bounced this morning on renewed optimism on positive trade-talk developments between China and US, Nomura’s Charlie McElligott warns that global growth proxies continue to exhibit poor optics and fits with Chinese financing / ‘credit impulse’ data which is far worse than expected.
Global growth ‘tea leaves’ still not painting a pretty picture:
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Crude bleeds further, with both Brent and WTI -2.0% currently
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Japanese stocks -2.1% (Nikkei was -3.5% at one point) and led lower by cyclicals—Industrials -2.7% / Energy -2.9% / Financials -3.0% / Tech -3.0% / Materials -3.2%, showing especially negative sensitivity to the Apple iPhone concerns
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Asia EM Eq still weaker too across Taiwan, S Korea, Singapore, Malaysia and Vietnam despite EMFX marginally better
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Chinese Industrial Metals futures continuing their horrid trajectory (negative implications for “inflation expectations”), with Nickel -12.9% over the past month; Zinc -9.3%, Deformed Bar -8.6% and Hot-Roiled Coil -10.7% over the same 1m span
The Chinese Aggregate Financing data, while expected significantly “weaker” in light of the recent push from Chinese officials to force higher lending quotas …was still a negative-shock despite the lowered-expectations, with massive “misses” across all metrics (remember too that authorities boosted the Sep headline numbers with some accounting-fun, adding ‘local bond sales’ to the overall financing tally and creating a false-optic):
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Aggregate Financing was 728.8B Yuan in Oct vs 1.3T Yuan survey and vs 2.17T Yuan the prior month
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New Yuan Loans were 697B Yuan vs est 904.5B survey and 1.38T the prior month
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Broad M2 money supply increased 8.0%, down from 8.3% in Sep
Further, some headlines from China just out which may in-act disappoint Chinese Equities further upon their reopen tomorrow:
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*CHINA WON’T USE EXCESSIVE STIMULUS TO BOOST ECONOMY: LI
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*CHINA WON’T DEVALUE YUAN TO SUPPORT EXPORTS: LI
As Nomura’s Managing Director of Cross-Asset Strategy, McElligott suggests the key to risk-asset stabilization remains “movement” at the G20, where a best-case “detente” scenario would be a delay on the third tranche of tariffs planned to launch at the start of the new year – we would play for this with ‘wingy’ SPX Call Spreads.
“Here’s the deal,” McElligott explains: ‘tighter financial conditions’, ‘Dollar Shortage’ thesis, ‘max QT’ (between The Fed, ECB, and BoJ) and trade tariffs are all ‘biting’ at the same time…
…as fundamental data is getting downgraded…
..and removal of extraordinary liquidity are overriding these occasional bursts of optimism regarding the status of U.S. / China trade relations:
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U.S. Dollar (BBDXY) is at 18 month highs
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U.S. real yields (5Y TIPS) at 9 year highs
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“Max Quantitative Tightening,” with G3 Central Bank balance-sheets seeing their YoY rate-of-change contracting to outright NEGATIVE in 4Q18
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Fading U.S. economic momentum, with the diminishing returns of the tax-cut fiscal stimulus seeing QoQ expectations for US GDP growth consecutively lower from 4Q18 through 4Q19
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Similarly weaker global GDP growth change expectations, with Japan, Europe and China all weaker in 2018 and EU / China expected lower again in 2019, with Japan expected just ‘flat’
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Clear reversal and breakdown LOWER in global manufacturing PMIs, with the JPM’s aggregated Global Manu PMI index now down 9 of the last 10 months
Add-in the unwind-y behavior in the very exposed Tech sector (the Apple supply-chain beat-down saw additional victims overnight, with Japan Display -9.5% and Hon Hai Precision Industry slipping to the lowest level in five years, with Dialog Semi and AMS again lower in Europe this morning), further punishing long books that are crowded into the multi-year hiding place of “Growth” and you have the makings for atrocious sentiment.
The “kick save” required right now to turn this global risk-sentiment “bleed” is something at the G20 between Trump and Xi (and as previously noted, I plan on being “out” of my current tactical SPX long by then on “disappointment risk”) – which realistically at best is a smiling handshake photo opportunity and a lower-probability delay of the third $267B wave of tariffs (per the DC consultants, a reversal on the existing first two tranches / the $253B and $113B of tariffs is highly unlikely at this juncture)
This theoretical “tariff delay” scenario at the G20 is the obvious potential catalyst for “upside” SPX trades; however, vol remains expensive and call skew unattractive
This “Equities upside” play is further challenged too as investors have pivoted bearishly in light of the negative performance-driven “de-gross,” and NOBODY wants to sell puts to buy calls—thus the only trade which makes sense is “wingy” call spreads
I plan on being OUT of my tactical SPX “outright long” which I have pushed due to the resumption of “mechanical” demand sources in the market over the past two weeks into G20, as I believe there is a greater likelihood of disappointment at the event; HOWEVER, the most attractive UPSIDE hedge / TACTICAL play then becomes the Dec7 SPX 2815 / 2855 CS for 7.40, getting you 4.4 : 1 leverage (20d 10d call spread)
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Looking further out, McElligott continues to believe that in-line with his “financial conditions tightening tantrum” phase 2 end-game, risk-markets will again fade as we push into the March 2019 Fed hike, which will push policy “restrictive” alongside higher Dollar and higher real yields as economic “slowdown” forces (tighter USD-liquidity).
Sometime in 2Q19, the Nomura strategist would then expect the UST curve to STEEPEN as the market then prices-in the end of Fed normalization, where then we should expect the more “risk-off” trading environment and acceleration of “low vol / defensive / value” trades within the Equities-space at this point in the cycle.
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