Taking the 10% (yes 10%) surge in Chinese stocks in the last two days as a sign of anything other than pure market manipulation is a mistake.
This is the biggest 2-day spike in Chinese stocks since March 2016 as The National Team stepped in 'just one more time' (and that did not end well).
How many more times do the incessant gamblers double-down that this rebound is different and just a little bit more stimulus, monetary - of course, will reverse the almost decade-long trend of slowing growth in the red ponzi (as debt spirals out of control)?
Furthermore, while US markets are rebounding from overnight lows, former fund manager and FX trader Richard Breslow notes that his first thoughts upon reading the news from China and Italy was that it was an awfully tepid response in asset prices outside of their domestic markets.
Upon further reflection, it feels like traders are simply disengaged. It isn’t a good sign. No sign of stoked animal spirits to be seen. Cover up the prices on your screens showing Chinese equities up over 4% and you wouldn’t know anything had happened other than a typical Monday without a lot of economic releases scheduled.
To make matters worse, there are a number of central bank meetings later this week and consensus seems to be these will be mostly non-events. Even in places like Turkey and Russia. The ECB is widely predicted to be as non-committal as President Draghi can get away with. Analysts think the greater risk is he errs on the dovish side. I wonder. But if that’s consensus, how much hawkishness will the Scandinavian central banks allow themselves? Even though they need to set the table for rate hikes just over the horizon.
The European flash PMIs are likely to be mediocre. The U.S. midterms are but two weeks away and no one seems to have a good handle on what effect the various potential outcomes will have. The Middle East remains a mess. The Buenos Aires G-20 is too far away to move markets. And I get the distinct impression that traders are getting fed up with all the noise regarding Brexit, which produces spiky but largely untradable moves that resolve nothing.
I know there was some political news out of Australia, but would you have expected to be taken seriously had you predicted that Chinese equities would soar and commodities stabilize yet the Aussie wouldn’t be able to catch a bid? And with everything going on, 10-year Treasury yields are virtually unchanged without even managing a three-basis point range. German bunds were just as bad.
It’s as if investors have decided that there are existential risks out there which make traditional reaction functions to economic news irrelevant. Even stocks flying around isn’t getting a rise out of other assets. All of which means that handicapping where markets are likely to end the year may be far more of a mug’s game than we ever realized.
What started at the beginning of the quarter as traders energetically chasing asset prices and performance has quickly moved toward disgust at getting chopped to pieces. Investors may have decided to take their ball and go home until some of the dust settles.
[ZH: and if proof were needed that market liquidity has evaporated, the following chart from Goldman shows, there is no liquidity in size since the start of 2018...]
Judging from the various hedge-fund tracking indexes, portfolio managers may have decided that digging themselves further into a hole isn’t a great strategy for saving their year and impressing present and potential limited partners.
This also means correlation matrices may struggle to predict coincident movements. Sometimes, markets just refuse to oblige by making sense and trending on command. Investors need to accept that they need to trade, or not trade, what the market will bear.
It appears the market is already realizing what a farce the ramp was...