There was much chatter by the punditry in the early part of 2013, when the Shanghai Composite appeared relentless in its surge, when it was tracking the S&P virtually tick for tick, hitting a 2013 high in mid-February, and which was "explained" to be the prima facie proof of the Chinese rebound. The reason said chatter has disappeared is that as of last night's close, the SHCOMP is now officially red for the year.
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Why did this rapid and disappointing inversion occur? One simple reason: inflation, or rather the PBOC's response to the surge in G-7 central bank created hot money which is flooding China.
Overnight, the governor of China's central bank warned that they are now on "high alert [7]" as February's inflation figures came in hot. As warned here last year, China is the world's inflation-catcher and as the rest of the world prints, Bloomberg reports that Zhou Xiaochuan notes that monetary policy is "no longer relaxed," which might help explain why the Shanghai Composite is now negative YTD and underperforming the world's liquidity-fueled idiocy in stocks. "The central bank has always attached great importance to consumer prices," Zhou said. "Therefore we will use monetary policy and other measures to hopefully stabilize prices and inflation expectations."
Of course, with a tightening bias out of the economic engine of the world (which for now appears entirely irrelevant fundamentally) one might worry about not just global stock valuations (and earnings growth miracles) but the local government financing loans in China itself that, as Zhou notes, "are prone to risks."
Very odd to hear a central banker be so frank and honest but it appears the Chinese really do care about 'real' inflation - as they know the potential for social unrest that arises from soaring food costs (especially pigs it would seem as supply floats away.)
However, the take home here is that if and when a central bank makes it clear that no more easy money is coming, stocks are the first to take the hint.
For now only China has taken the hint: GETCO's DJIA ramping algos are still very much blissfully unaware.
But more important is the other tangent: with inflation once again on the rise in China, the direct beneficiary is always and mostly gold, as stocks are forsaken. Recall that the main reason for gold move's in 2011 from $1400 to $1900 was the soaring Chinese inflation (driven once more by global reflation and Chinese easy money policy). Judging by the recently rising price of gold, the days when gold langished with "more sellers than buyers", even as the Fed dilsuted base money by 3% every month, may finally be coming to an end.