Shanghai'ed

Macro Man’s yen concerns proved to be sadly prophetic yesterday, as the JPY has rallied strongly overnight before he could take remedial action. The prime mover here, as seems to be the case with many currency and bond moves, was of course China. Leaks of strong data prompted a sharp sell off in risk assets in Asia; those risks proved to be well-founded, as China’s GDP, industrial production, and CPI all proved to be substantially stronger than expected. The y/y growth rate of Chinese GDP accelerated to 11.1%; one would have to believe that, absent draconian lending restrictions from on high, borrowing rates in China would be comfortably higher. While the best China-watchers in the business are characterizing all this data as ‘temporary spikes’, it strikes Macro Man that there was a remarkable confluence of such spikes in China during Q1- except, of course, in the value of the RMB.
Over the course of the session the Shangai market fell sharply, taking the rest of regional equities with it. The rationale for the decline was that yet another upside surprise for nominal GDP (real growth and inflation) will force a legitimate policy tightening and send Chinese shares lower. Even in today’s short-attention-span market, many traders seem to vaguely recall that they were Shanghai’ed a couple of months ago. The memories are fuzzy, mind you, but it was enough to take some money off the table.

Macro Man is joking, of course; or is he? The chart below shows the performance of the Shanghai index on a logarithmic scale. While you can just about make out last night’s wobble and February’s jitters, to call them “blips” is almost overemphasizing their importance. While Macro Man would feel queasy about going long at these elevated levels, particularly with Chinese margins on the wane, that’s not to say that yet another round of policy tightening will send shares spiraling lower. The most likely outcome is sideways action such as that observed in January-February. Low delta wingnut downside might make some sense as a punt, but Macro Man needs to dig a little deeper.

Elsewhere, US fixed income has rallied sharply over the last couple of sessions, and Macro Man has frankly screwed the pooch here. His 108 puts expire tomorrow and were almost a point in the money a few days ago; they’re now out of the money. Failing to hedge his deltas has cost him a pretty penny, especially as the collapse in breakeven has meant that TIPS pricing has barely moved. There’s no use crying over spilled milk, however; his plan was to exercise the options and turn the long TIPS into a long breakeven position; that trade has gone against him, so it’s only fitting that he loses money. The rally in the homebuilders seems slightly more perverse, so Macro Man is inclined to add to his short. He will look to sell an additional 100,000 XHB towards resistance at $35.50.