More thoughts on China

So the "shocking collapse" in Chinese imports was so severe that global equities ripped yesterday, albeit with the aid of a friendly kickstart at the end of Tuesday's Shanghai session.  Even the "collapse" is something of an overstatement; the second derivative of the y/y change of the 3 month moving average (which mitigates the impact of the Chinese new year variability) has been turning up for a few months now.

Scant comfort, perhaps, but Macro Man seems to recall the Bernanke Fed trumpeting the green shoots of a second derivative upturn in 2009, perhaps the last time that the Fed struck a positive chord about anything.  An even more speculative measure- the 3m/3m change of the (admittedly non-seasonally adjusted) series- remains positive, albeit receding slightly from recent two-year highs.

Again, echoing yesterday's commentary, this does not necessarily mean that it's safe to sound the all-clear in China, or even that the economy isn't still decelerating.   Macro Man would suggest, however, that if the chart doesn't look like a 2008-style freefall, then it very well may not be one.

One aspect of the RRR that Macro Man neglected to mention yesterday is its utility as an indicator of China's currency policy.   Simply put, PBOC and SAFE have a bit of form when it comes to marrying FX policy and the RRR.  This shouldn't come as a massive surprise, given the importance of the latter as a sterilization tool for market intervention in the former.  Nevertheless, as a big-picture tool for assessing the current state of play of FX policy, you cannot do much better than the RRR. 

In 2008, for example, the first cut in the RRR more or less coincided with the end of the RMB's appreciation trend.  In 2010, the rise in the RRR foreshadowed the re-ignition of the appreciation tend by a good six months.  Again, this stuff won't tell you where USD/CNH will be in two weeks, but it does offer a little glimpse into official thinking that may be useful in the future.

So if China does decide to remain anchored to its tectonic plate and not slide en masse into the Pacific, that could be kind of good news, right?  As noted in the comments, some European equities have a had a proper drubbing over this, and as previously discussed in this space look fairly attractive on a broad range of metrics.

So it is interesting to note that the DAX is perched just below a little shelf of resistance, a break of which leaves a lot of fresh air for a move back above 11,000.  It can obviously be dangerous to preempt such a break whilst below the resistance, particularly in these rather volatile times.   

Even though vols are high, the Oct 11,000 call at 60 ticks or so doesn't seem particularly outrageous; three trading days and that sucker could be paritized.  With the buyback engine apparently getting re-started in the US and a market still stiff with uncertainty over the Fed, having a little bottom-of-the-drawer ticket for a ride on a rocket ship isn't the worst idea in the world.

Who knows?  It might even be made in China.