Week End Blog – Panda Power!

· by · in FINANCIAL MARKETS, MACRO. ·

China is leading markets once again. But, different from the start of the year, this time it’s not guiding markets down. Peace and quiet on the CNY front and improving Chinese macro data are giving investors  comfort. China’s GDP (reportedly) grew 6.7% in the first quarter, matching expectations. Not that this is healthy growth, of course. Bank lending is going crazy again. China just can’t give up on its credit-driven growth model. Corporate credit growth topped GDP growth every single year.

But don’t let that spoil your opportunistic state of mind. Chinese exports recovered in March and are now growing again. Industrial production, retail sales and fixed asset investment all surprised on the upside. What a couple of percentage points of devaluation won’t do for you.

If it wasn’t already obvious, China is very much in easing mode. This was confirmed by the massive growth of M1 money supply, which topped 22% in March. This is the fastest pace of money supply growth in over five years.

One thing is still missing from the Chinese growth story, though. Earnings! Earnings of companies included in the Shanghai Composite Index have not grown for four years. Since China could really use some equity inflation, to push debt-to-equity ratios down, earnings seem mandatory.

China was among the very few countries that got an IMF growth upgrade this week. For the global economy, however, the IMF, again, lowered its GDP forecast. For 2016 it now equals 3.2%. But, other than some really cool graphs, the World Economic Outlook should be taken with a grain of salt. The IMF is just not that great in forecasting GDP growth.

What is perhaps less difficult to forecast is the debt-to-GDP ratio. Because it tends to go up, all the time!

More debt is problematic for banks. We understand that ever since the Lehman crisis, right? Banks have been pretty poor investments, especially in Europe.

In fact, it seems that two European countries are stuck in a ‘financials race to the bottom.’ In both Greece and Portugal the stock market value of financial companies has evaporated completely.

One particular dire case is the fall of the world’s oldest bank, Italy’s Banca Monte Dei Paschi di Siena.

Over to the U.S., where GDP forecasts have come down considerably in recent weeks. The Atlanta Fed GDPnow nowcast (difficult combo) suggests the American economy almost stagnated in Q1, making a recession more likely. For investors earnings could be a much bigger threat, however. Earnings recessions have often coincided  with equity bear markets. And since Q1 S&P 500 Index earnings growth is expected to be way below zero, this is one to keep in mind.

Meanwhile, defaults keep rising. Especially in the commodities space. US commodity-related HY bonds are now defaulting at a 15% pace. Still, back in February spreads suggested 50% of HY energy companies would go bust, so we are still kind of ‘ok’ here.

Employment keeps powering ahead. While Fed people have made a habit of selectively overlooking employment data, things are actually looking pretty strong. Initial jobless claims fell to the lowest level since 1973. I think that warrants at least a couple of rate hike, don’t you Ms. Yellen?

Two to go! First, if you think London’s property sector is crazy, try Hong Kong. That’s just nuts!

And talking about ‘nuts.’ Check out Japan’s little QE game. The Bank of Japan owns a third of all outstanding Japanese government debt. Hello!

Thanks for reading the Week End Blog. Enjoy your weekend. I know I will…

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