Thursday, January 21, 2010
Well, yesterday it looked as if equities were preparing to dump after all before a late session recovery mitigated the day's losses and left bears of Macro Man's acquaintance gnashing their teeth. Plus ca change....
Macro Man was intrigued this morning to see the first singificant downgrade of equity fundamentals that he's observed in what feels like forever. CS has reportedly trimmed its forecast for 2010 FTSE dividends from from 219 to 198; based on last night's close of 189, that suggests that upside of current year dividend swaps was cut from nearly 16% to less than 5%. It's a small drop when compared to the torrent of optimism emanating from the donuts on CNBC, but nevertheless is interesting coming from a heretofore unmitigatedly bullish shop.
Another reason for caution remains, of course, China, where the data dump this morning came out more or less bang in line with yesterday's leaks. The activity data is now pretty clearly a "V" (Q4 GDP rose 10.7% y/y); unfortunately for the authorities, inflation is threatening the same. While input price inflation is always more volatile than output pirces or CPI, the recent surge will concern the PBOC over potential pipeline pressures. And if there's anything the CCP likes less than unemployed urban factory workers, it's rioting peasants who cannot afford to eat. Food price inflation in China is now 5.3% y/y; while that's pretty modest in comparison with the mid-2008 highs, it's also moving swiftly in the wrong direction.
More meaningful rate rises in China are looking likely; real yields on 1 year government paper have swung back into negative territory, which ain't exactly what a 10.7% growth economy needs. While we will soon enter the silly season for Chinese data (with y/y comparisons distorted by the changing dates of the lunar new year), it is starting to look like locals are starting to pull in their horns.
Macro Man suggested an H share futures short the other day (he is restricted from trading ETFs or non-sovereign credits), which ahs thus far worked well. He's also been intrigued to see the recent weakening of the HKD off of the 7.75 base, which is certainly illustrative that something has changed, though it's hard to say exactly what.
And taking a swift look onshore provides an intersting counterpoint to the bullish growth consensus for China. Note that despite uber-abundant liqidity conditions, the property sector subindex in Shanghai is looking very limp indeed. Given that construction investment has been one of the primary beneficiaries of the Chinese stimulus program of the past year or so, it's not exactly a resounding vote of confidence, is it?
And so, with the dollar looking stronger than Hercules, potential tightening/slowdown in China, Greece imploiding before our eyes, and even an RBA board member suggesting that rates are close to neutral, Macro Man is left to wonder why copper is near its post-Lehman highs and Ozzie's still got a 90-handle, among other things. To be sure, markets like Korea are still performing well....but it's been a cold winter in China, and it might be time to start wondering what happens if the country sneezes.