TMM have noted the markedly weak performance of HSCEI and HSI recently ( HSI threatening the 100 day moving average which has been pretty good support/resistance over the last 2 years) following fairly indifferent macro data showing that not a lot has changed - retail sales are soft, CPI is trending higher and as usual it seems to all be funded by a very large expansion of wealth management products. The market is not impressed and not without good reason.
TMM have also noted that more high frequency data on power production from www.serc.gov.cn has also shown very weak power demand growth which is generally associated with weaker steel, cement and metals output. TMM don't expect the situation to improve and while betting on iron falling is pricey given the curve, it has not stopped people selling down metals and miners.
Now, while much of this is more the concerns of Australia, China and mining companies, it should be remembered that a lot of S+P earnings come out of China - enough so that comments like this from the March Beige Book gave us pause: "A contact that supplies material for filtration says the global picture is difficult to pin down because Chinese New Year and the seasonal Christmas shutdowns in Europe made year-on-year comparison particularly difficult in recent months. Finally, several respondents expressed uncertainty regarding China, with one saying that some of his Chinese customers reported dramatic reductions in sales, inconsistent with government statistics."
To that end, TMM are not that shocked at how certain parts of the S+P with large shares of non-domestic sales are having a tough time in a torrid rally - look at autos or caterpillar for example. TMM think that when putting on the "USA OK!" trade, a little more thought should be done before filling your boots with E-minis.
Going back to China, TMM think that China's seeming preference for controlling inflation is going to make this year a tough one for equity investors as liquidity gets scaled back to avoid another inflationary pulse. The more interesting trades are likely to be in markets where relative input price stability may make it possible to conduct deregulation and much needed reforms, most notably in petroleum products and energy, and ultimately more financial liberalization.
Back to liquid macro however, TMM think the recent strength in AUD in the face of this says a great deal about how much faith the market has in US activity's ability carry the world with it. We aren't so sure and especially not in Australia. TMM think that given the slew of rubbish earnings and outlooks from engineering companies and mining services companies in Australia that capex is coming off fast and that the RBA is unlikely to be a long way behind the curve.
So TMM are looking to short AUD on this bounce, but are very aware that short AUS has been a back pocket trade for the macro world for a while now. Whilst "long term investors" and rate differential players are squeezing some of those positions out in the short term, short Aud/usd spec positions still persist. So we may expand our Aud short thoughts beyond just usd and look for a counter that has great technicals - so why not ZAR? TMM are still of their "Township of the Damned" opinion on the country (and may we say - we nailed it) with its expanding current account and worsening terms of trade but, it has become a consensus now to the point of yennishness and is very crowded. The technical picture is also supportive with a very nice soothsayer signal in aud/zar suggesting now is a good time to counter the trend. We do, however, understand the risk of getting our comeuppance (Egyptian Pound longs style) for being contrary for the sake of being contrary but we think there is enough macro behind the China story to trigger a return to stronger old fashioned correlations in the markets and a wash out of some complacent positions.
Or in basic English .. "YOURS"
Finally, is it just our behavioural biases that are making us think that this week in March is particularly sensitive to turns or is there really something to it?
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