"Daggers Are Falling From The Sky" - China Stocks, Bonds Tumble After National Congress Ends

Who could have seen this coming?

After weeks of "calm" - demanded by The People"s Party - and well-managed "National Team" ramps top "prove" how much Xi"s plan for the nesxt five years is being received, the end of China"s National Congress has been met with... a plunge in stock and bond markets.

 

 

This is the biggest drop in the Chinese market in 11 weeks...

But it"s not just stocks. The Chinese bond market is getting slammed...

China 10Y yield is up 6 days in a row (the biggest surge in rates since May) to their highest since Oct 2014...

With the Chinese yield curve now inverted for 10 straight days - the longest period of inversion ever...

As Bloomberg reports, the situation that’s existed for most of 2017 - sovereign yields rising, and corporate debt remaining relatively resilient - is at risk of cracking. As appetite for bonds of any kind dwindles and authorities roll out measures that target higher-risk investments, company securities are in the line of fire.

Now that the Communist Party Congress is over, China’s bond holders may be about to get hit by “daggers falling from the sky," said Huachuang Securities Co., referring to aggressive deleveraging policies.

 

“It’s very likely we will see a significant increase in corporate yields in the coming year," said David Qu, a market economist at Australia & New Zealand Banking Group Ltd. in Shanghai.

 

"The trigger could be tougher regulations or a default. A majority of non-bank financial institutions’ debt holdings are corporate bonds, so their selloff can lead to severe consequences. Banks are underestimating authorities’ intentions to tighten regulations.”

 

“The deleveraging campaign hasn’t even gone half way, and the risk of banks redeeming entrusted funds could surface at the end of this year," said Qin Han, chief bond analyst at Guotai Junan Securities Co. in Shanghai.

 

"The chance of a selloff in corporate bonds is increasing, which will result in a widening of their yield premium over sovereign notes."

But this is far from over, as we noted earlier, the end of China"s National Congres is also ushering in the end of "coordinated global growth"...

As Citi writes, "China’s Party Congress has concluded and Xi Jinping’s position as President has been consolidated. Given there are no standing committee members in their 50s, it suggests there are no apparent heirs for Mr. Xi, opening the door for him to stay on beyond 2022. One of the key questions in the run up to the congress was that once power was consolidated, would China accelerate its economic reforms. We think this is unlikely but do expect a moderation of growth, with data momentum perhaps set to continue to slow at its current pace. Note how China’s MCI tends to lead Citi’s macro data index for China and our MCI is still tightening."

It gets worse.

As Capital Economics writes in its China Activity Monitor note this week, the firm"s China Activity Proxy (CAP) suggests that growth in China slowed last month to the weakest pace in a year and with property sales cooling and officials continuing their efforts to rein in financial risks, Cap Econ thinks that looking ahead "the economy will slow further over the coming quarters."

CapEco"s ominous conclusion:

Looking ahead, we think growth will continue to slow over the coming quarters. The current props to growth appear shaky. With investment contracting in real terms, industrial output will probably soften over the months ahead. Property sales also look set to weaken further as the government’s purchase curbs continue to expand. This will weigh on construction before long. More generally, with tighter monetary conditions weighing on credit growth, activity looks set to weaken further.

That the past 18 months of coordinated global growth will end in China, is quite symmetric: back in January 2016, as global markets were tumbling, aborting the Fed"s plans to hike rates 4 times in 2016 and resulting in sharp economic slowdowns around the globe, it was the (still mysterious) Shanghai Accord that "saved" the world, and unleashed a burst of unprecedented, and coordinated, growth... which only cost China some $8 trillion in debt.

It will only make sense that another major Chinese event will mark the top of this economic mini cycle, and lead to the next global downturn, not to mention spike in market volatility.

China Desperately Silencing Opposition Ahead of Critical Communist Conference

(ANTIMEDIA Op-ed) — It’s no secret that China has placed an incredible amount of importance on 19th National Congress of the Communist Party of China, and the Asian superpower has and is taking steps to ensure the affair, set for October, goes off without a hitch. From Reuters on Thursday:

“China is tightening security for next month’s twice-a-decade Communist Party Congress, canceling police leave in Beijing, limiting tourism to Tibet, and clamping down on the spread of political rumors.

“High-level meetings in China are typically accompanied by a security crackdown — as well as uncharacteristically smog-free blue skies — with the stability-obsessed party not wanting to run the risk that anyone or anything offers a distraction.”

Continuing, Reuters notes that Chinese authorities and their enforcers in the streets will tolerate no political protests leading up to and during the event:

“Some 2,000 delegates will converge on Beijing for the Congress, staying at hotels across the city, and security will only get tighter as its opening nears, meaning any protests will be quickly shut down.”

This is because China puts a high value on perception, national unity, and loyalty to the party. Perhaps this is best evidenced by the actions of the country’s leader in his urging of Chinese artists to direct their work toward the betterment of China. From state-run China Daily on Thursday:

“President Xi Jinping called on the country’s cultural workers and artists to focus on the people during their cultural creation work, thereby providing strong spiritual power for the great rejuvenation of the Chinese nation.

“Xi, also general secretary of the Communist Party of China Central Committee, made the remark in a recent instruction on the country’s building of spiritual civilization.

“Noting that culture is the bugle for the progress of the times, Xi said that the country’s cultural workers and artists should work for the people and socialism. He encouraged cultural workers and artists to boost innovation, be dedicated and make continuous efforts to produce excellent creations.”

Highlighting Xi’s tightening grip on power — at the Congress, the leader is expected to appoint his own trusted people to key positions in the government — a member of the influential Standing Committee, Liu Yunshan, backed his president’s play while speaking at the same seminar as Xi on Wednesday:

“The cultural workers and artists should learn and implement the president’s culture and art thoughts, devote themselves to cultural creation, and make more excellent cultural products, he said.”

And while China’s political leaders encourage unity, the country’s Thought Police are intensifying efforts. It’s long been recognized that China is more aggressive than Western nations in policing its cyberspace, but ahead of the Party Congress the government is taking sharper aim at dissidents. Also from China Daily on Thursday:

“Chinese cyber police and leading tech firm Baidu have launched an online service to control the spread of rumors.

“The service is imbedded [sic] into the country’s top search engine, and all news portals and online forums that Baidu operates.”

All this focus on harmony and a “One China” is precisely why the independence movements in Hong Kong and Taiwan are such a thorn in the superpower’s side. How can China promote strength and unity to the world when two of what it considers its territories want to break away?

The problem is perfectly encapsulated in China’s current relations with Singapore, as Reuters highlighted on Thursday:

“China wants to improve its military relationship with Singapore, but is resolutely opposed to any country having defense ties with self-ruled Taiwan, China’s Defence Ministry said on Thursday, obliquely criticizing Singapore’s Taiwan links.

“China is suspicious of the city state’s good military relations both with the United States and Taiwan, claimed by China as its own.”

The current Taiwanese government is a remnant of the one that was forced to flee the mainland to escape the communists in 1949. While the country is recognized internationally as an independent state, China has never accepted that reality.

Hong Kong, on the other hand, is not a country but a “special administrative region” of China that retains a high degree of autonomy. That’s been the situation since 1997, following Britain’s decision to relinquish control of the area in the 1980s.

But concerns over China exerting its influence over the region were there from the start and eventually culminated into mass, coordinated protest rallies that began in September of 2014.

The desire for independence has only gained strength since then. According to the South China Morning Post, on Thursday — the third anniversary of when the protests kicked off — the co-founders of the movement “implored the people of Hong Kong to continue to fight for universal suffrage and defy what they say is Beijing’s resistance to democracy in the city.”

China wants to present a unified front at the upcoming National Congress. It wants to prove there really is only “One China,” as it’s always said. The problem with that, as is becoming increasingly clear, is that not everyone under the country’s supposed control feels the same way.

Op-ed / Creative Commons / Anti-Media / Report a typo

Could The 'China Puke' Signal The Lows In The Dollar?

Authored by Kevin Muir via The Macro Tourist blog,

Trading is difficult. If anyone tells you differently, they are either new (and haven’t been hurt yet), or just plain stupid. You are competing in the greatest game out there, against some of the smartest people on the planet.

Even when you do your analysis and get the call right, it is no guarantee you will make money. The Market Gods have a way of making sure that being right is way easier than stuffing dough in your pocket.

The perfect example of this is my call from early in summer regarding China. In May, Moody’s downgraded China, and everyone got their knickers in a knot predicting the collapse of the world’s largest economy. The guru type hedge fund media outlets were filled with grim forecasts of a spiraling 2008 type crisis. These hedge fund managers sure sounded smart, and they all definitely have a lot more money than me, so I was a little timid when I wrote a piece called China Downgrade- Buy the news?.

The gist of my argument was that China would stimulate to make sure their economy was humming along when the hugely important 19th National Congress of the Communist Party was held this Autumn. Proving that a stopped clock is right twice a day, I managed to get this one right.

The trouble was, I didn’t buy the right stuff. I should have loaded up on copper and the other China centric commodities.

Have a look at the copper chart.

China was downgraded, and then copper ran like it stole something.

Same deal with iron ore.

There is no doubt China put the gas pedal down this summer, and it affected capital markets throughout the world.

None more so than the Chinese Yuan. Although most hedgies were all betting on a massive decline, the Yuan has been strengthening like Lance Armstrong after visiting his bio-chemist.

This massive strength has forced at least one prominent China bear to throw in the towel. From Bloomberg:

Mark Hart spent seven years and $240 million waiting on a crash in China’s currency.

He lost sleep. He lost clients. He damn near lost his sanity.

And now he’s lost his conviction: Hart, who called for a more than 50 percent yuan devaluation last year, has turned bullish on China and its currency.

His reversal hasn’t come easily. From his base in Fort Worth, Texas, the hedge fund manager spent countless nights on the line to Hong Kong, parsing market news and exchange rates. At times, the stress took a toll on Hart personally and left his employees demoralized.

“I always thought we had a good risk-reward trade on, but we made a number of mistakes, including being way too early,” Hart, who started the yuan bet after predicting both the U.S. subprime mortgage bust and the European debt crisis, said in a telephone interview. “And now the world has changed.”

In cool hindsight, the 45-year-old founder of Corriente Advisors sees last year’s Group of 20 summit in Shanghai as a key turning point. Like many investors, Hart suspects the meeting resulted in a tacit agreement among world leaders to prevent the yuan from tumbling. He calls it China’s “whatever it takes” moment – when policy makers resolved to prop up the currency at any cost.

“China now has the breathing room it needs to either temporarily stave off a slowdown with fiscal and monetary stimulus, or reform, grow and upgrade itself into the world’s largest developed economy,” Hart said.

Whether or not China got help from other G-20 nations, the government has clearly succeeded in stabilizing the exchange rate. The yuan ended a three-year slide in late December and has rallied almost 7 percent in 2017, including a 0.5 percent increase on Thursday. It’s now trading at the strongest level in more than a year versus the greenback.

Even at its weakest point, the yuan never dropped enough to move the needle on Hart’s wager, which started in 2009. His dedicated China funds, which had fixed lifespans, bought options that were designed to deliver one of two outcomes: a massive payoff in the event of a currency crash, or a near total wipeout if a major devaluation failed to occur.

The trade went against him almost from the beginning. After holding steady for the first six months of 2010, the yuan strengthened for the next three and a half years. It eventually reversed course, but the sharp devaluation that Hart had anticipated never materialized. His second China fund shut in December. All told, he lost between $240 million and $250 million.

When long time bears finally cry Uncle, it’s most likely a short term top. These trades are taken off at a point of maximum pain, not in the midst of a cool, well thought out, investment decision process.

This morning copper is unexpectedly down 1.5%. Gianclaudio Torlizzi, an LME Metals Trader, has posted a couple of terrific longer term charts of Iron Ore and Rebar that show potentially bearish developments.

I know the Chinese have not had their big assembly. But it sure feels like we are close to the point where many of these trades are about to roll back over.

Right now everyone is all bulled up on gold, and extremely bearish on the US dollar. No one can imagine any of the short term trends stopping. I wonder if copper is the canary in the coal mine that a turn is at hand.

*  *  *

Here is another thought. If China has been goosing their economy for their plenum, then could market strategists be misreading the recent economic global strength? Did China create a false positive for world growth?

I am not sure, but it is worth considering. I have long said that what happens in China is by far the most important determinant of financial asset prices. We all sit staring at US economic releases, but we should really be spending more time trying to figure out what China is up to.

*  *  *

If a turn in the US dollar is indeed close, then take a look at the Eurostoxx chart.

With EUR screaming higher, it is no wonder that the Eurostoxx has been declining. Yet what happens if USD gets a bid? A break in the Eurostoxx downtrend line could be explosive to the upside.

Bill Blain: "It Looks Like North Korea Is No Longer Playing To The Chinese Script"

Submitted by Bill Blain of Mint Partners

What we don"t know about Korea and China?

“The Chinese use two brush strokes for “crisis”. One brush stroke stands for danger, the other for opportunity.”

Everyone is guessing about North Korea! Who knows what happens next… Probably less than markets fear.. but that won’t stop us worrying about it…

The reaction of markets (on a US holiday) might mean the antics of the Hermit Kingdom are losing some of their capacity for immediate shock and destabilisation. Are markets becoming blasé about the repeated threats? Probably not - the pressure on asset prices and price volatility remains high as participants anticipate a wide range of outcomes.

What’s the right asset positioning? Risk on/off? What are the dangers in terms of the liquidity/return/safe-haven equation? Do nothing and hope it all plays out positively? (Hope is never a strategy.) How contained will it be? Take a defensive stance and miss upside if/when its resolved? Or buy the dips because the risks are massively overstated and its “opportunity”!

Either you know… or you are guessing.

Smarter political minds than I might be able to work out scenario probabilities on how this plays out.

I buy into the current impasse as a China story: To what extent can/might China exercise guidance and control? It rather suited them to watch Trump fulminating and leave him embarrassed. That may no longer be true. It rather looks like the North Koreans are not playing to the script – clearly catching China as surprised and angry as the rest of us at a hydrogen blast 10 times more powerful than Hiroshima. The potential for China to lose patience with N Korea adds a new factor.

Initially it looked like China would be the likely winner, playing the blessed peacemaker role in its own backyard. We were trying to figure what potential upside for China of scoring geo-political points if Korea goads Trump into doing something “hasty” might be? And, what would be the figurative and literal fallout if the Americans lose patience.. (pretty much a worst case scenario)? 

The current what-ifs could change in an instant… I read a number of analysts making contrarian calls about the opportunity to buy cheap Korean stocks and go long the Won. Perhaps it changes the China equation – especially if there is a flood of refugees from the North as some analysts suggest?  Putting China under pressure immediately ahead of the Peoples National Congress in October (picking the next leaders) is an “interesting” shot across the bow.

The other big known unknown this week will be the ECB meeting - and in this case I confidently expect market disappointment.  Draghi will wait before giving any definitive guidance on the direction and scope for further asset purchase schemes. In other words it will be more uncertainty about when the ECB starts to tighten (for that is what a taper effectively is.) We won’t know till later this year.

The big question is the Euro – at what stage does the ECB start to signal its “concern” about the strength when inflation remains weak and the fledgling recovery is still taking hold. Or does the market decide for them? No sign of weakness from a market still convinced Europe is a big recovery story. That could change. 

I continue to harbour suspicions on just how papier-mâché the European façade is. Last week I was reading through the lists of eligible ECB bonds - it’s a pretty complete list of every bond deal ever launched. We know what, but not how much, they buy of that list.

Based on a hint from the excellent Marcus Ashworth of Bloomberg, one issue that got me thinking is the stack of European Sovereign and Agency bonds the ECB holds: there is a letter from Draghi on line confirming the ECB holds no EIB bonds.

So what do they hold in that Euro 180 bln SSA portfolio?

There is a long list of eligible European agencies and banks with government support, ranging from French railways to Landesbanks, to Italian savings banks to Portuguese agencies.. Not saying - not for one moment - that these are tat issuers… but they are sovereign obligations with sovereign ratings for a reason..…