The best summary of what happened overnight comes courtesy of Michael Every, head of financial markets research at Rabobank Group in Hong Kong, who was quoted by Bloomberg [7]as follows:
While the government helped boost stocks at least twice last week, according to people familiar with the matter, equities extended declines into the close on Monday. Even if state funds come in to defend the 3,000 level, it may not ultimately work, according to Michael Every, head of financial markets research at Rabobank Group in Hong Kong.
“Everyone rational wants to sell, while everyone official has been told to buy,” said Every. “By throwing good money after bad, it just delays the inevitable.”
Every was referring to China; he could have been talking about every central bank anywhere in the world.
And then, a close runner up, is Deutsche Bank's Jim Reid who in his overnight note, explains just why "everyone official has been told to buy"
A map, a compass, or even a satnav wouldn't make navigating current markets much easier at the moment. While I was on holiday I couldn't help be interested by the Nevsky Capital letter explaining [8]why it had decided to close down after 15+ successful years. The letter is worth a read but basically they suggest a lack of transparency and liquidity are making it very difficult to predict the future in a manner that allows for adequate risk adjusted returns. Transparency problems abound in EM with China at the forefront. They also argue that an increasing number of important EM countries are conducting 'nationalistic' policies over what had been a more transparent 'Washington Consensus' policy bias in the decade or so pre-GFC. This adds to the unpredictability. The liquidity issue is blamed on regulators and the rise of index funds and algos meaning that trading volumes have declined and badly executed trades can start an unintended trend in markets.
It doesn’t paint a particularly joyous outlook for global investors and supports our view that financial markets are broken but have been propped up by immense artificial central bank activity. We still think central bankers can still be relevant when inflation is so low (assuming no policy error) but we do think we're late cycle. Our view in the outlook was that we may have one more year left in the cycle before more difficult times arrive. Obviously the start of the year trading has increased the risks that this is too optimistic but we maintain our view for now. All in all it is a low visibility financial world with China having the ability to dictate performance with limited ability to analyse it properly in real time.
Because handing over the fate of the world economy and capital markets to a closed room of career economists... why what could possibly go wrong?
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