Quietly, and without the drama associated with The Fed and ECB, China unveiled what looks like QE recently (as we discussed in detail here). Whether this is a stealth creation of a 'fannie-mae' structure to support housing or merely another channel for the PBOC to shovel out hole-filling liquidity is unclear. However, one thing is very clear, demand for CNY is surging (even as the PBOC weakens its fixing) and the Shanghai Composite is surging as hot money chases free money once again...
The Yuan has rallied (lower on the chart) for 8 days straight as PBOC weakened its Fix.
The Chinese stock market has quietly surged to its highest since December - outperforming the Dow now year-to-date...
BofA believes 3 factors are at play here:
1. China: better data on exports & PMI, GDP upgrades (BofAML upgraded 2014 GDP growth forecast to 7.4% from 7.2%), policy U-turn putting floor on growth, hopes for a Chinese QE, success in anti-corruption igniting hopes for reform. And China is of course relatively inexpensive and out of favor: in price-to-book terms, Chinese financials are trading at their cheapest level in more than 9 years relative to global financials
2. US growth: NE Asia has historically been a play on US growth; no coincidence that flows to NE Asian markets are coinciding with stronger US GDP (up 4% in Q2).
3. The end of the carry-trade: this is the more intriguing argument. Almost all investors we meet believe that a rise in stock markets and a decline in bond yields will not continue indefinitely. We believe concern that rates must inevitably “normalize” in coming months as growth picks-up, and concern that a flip in Treasury yields causes stocks to decline is causing investors to consider raising cash and finding uncorrelated investments. Japan, China and Korea rank in the top ten equity markets least positively correlated with SPX and most positively correlated with movements in 30y UST yield (correlation analysis based on weekly log change over the past 10 years). Carry-trades are at risk from rising rates. We think markets with low yields and higher exposure to US economic growth will be better protected if the backdrop flips from Low Rates-Low Growth to High Growth-Higher Rates.