The China Syndrome

If financial markets were a Hollywood movie, right about now a Z-list ham actor would be chewing on a toothpick and saying “it’s quiet out there....too quiet.” Risky assets continue to teeter on the brink between Wave C(orrection resumed) and Wave V(-shaped recovery.)

Yesterday’s “news” that New Century is on the brink of collapse tried and failed to catalyze a renewed downdraft in risky asset prices, which to a degree restores Macro Man’s faith in the rationality of markets. Stocks don’t go from 30 to 3 because they miss their quarter by a penny, and most that make that journey end the trip in bankruptcy. As an aside, Macro Man suggested in his office that throwing a tiny bit of p.a. capital at NEW might make for an interesting lottery ticket bet. He was roundly hooted down by all and sundry, suggesting that NEW’s descent into oblivion is fairly well discounted.

The recent spate of data releases in China has put everyone’s favourite talking point back in the headlines. Macro Man has observed a dissonance in things Chinese recently. See if you can spot it: which of the following three charts does not make sense?

So why, in a month when the trade balance and money growth both surged, comfortably exceeding expectations, did the Chinese take their feet off the RMB accelerator? A cynic might observe that with the safe passage of the G7 meeting, the authorities in Beijing decided to take a break from currency strength. A fatalist might posit that they’ve decided that $20 billion a month in fresh FX reserves just isn’t enough, and that they have decided to accrue $30 billion instead. A statistician would probably tell Macro Man that his sample size of flatlining $/CNY is too small to be statistically significant. And an optimist might suggest that foreign capital has seen the light and tired of throwing money at the will-o-the-wisp that is the “unlimited opportunity of Chinese markets.” Macro Man quite honestly does not know, but if China did indeed step up its intervention activity in February, it could perhaps explain a bit of the euro’s strength against the dollar last month.

Elsewhere, rumours abound that the central bank of Russia has been selling GBP/JPY for the last 24 hours. Perhaps they are simply following the advice of C. Fred (I’ve been short USD/JPY for 15 years) Bergsten, who advocates that China buy yen in today’s FT. (As an aside, Macro Man wonders if Marjorie Scardino, CEO of Pearson, is massively short USD/JPY p.a., such is the cheerleading for a stronger yen in the FT recently.) Perhaps this is a reserve switch out of sterling and into yen. Or perhaps it’s the sort of aggressive, market timing alpha trade by an ‘official’ entity that has made the FX market so treacherous in recent years.

So squaring the circle, markets are left to speculate what could push markets into either Wave C or Wave V. The macro data, if sufficiently stagflationary or benign, could do the trick. So, too, could the release of earnings from a triumvirate of US investment banks this week, starting with Goldman today. Now, maybe GS (and LEH, and BSC) will display immunity from recent market volatility, and maybe they won’t. Either way, it’s best to keep an eye on them as a potential driver of near term market direction.