By Garfield Reynolds, Bloomberg Markets Live macro commentator and editor
China’s Return May Be Last Straw for Global Rebound
China will return from the Lunar New Year holiday to reinforce the gloom that’s seeping through global equities. The five-day break came with global equities scrambling to rebound from the collapse of early February. That bounce has looked fragile.
Bulls need the world’s second-biggest market to come roaring back refreshed but such a positive outcome looks unlikely.
China is key because it’s the only major market that hasn’t yet seriously bought into the fantastical stock rallies that got going once the ashes of Brexit had settled.
Over the past 1 1/2 years, record highs were set for all three major U.S. indexes, along with the benchmarks for Canada, Hong Kong, South Korea, India, the U.K., Germany and Switzerland. Stocks in Japan and Taiwan hit the highest since the early 1990s. Australia’s benchmark index reached a decade-high, as did France’s.
China was the only $ 1 trillion-plus national stock market missing out on the party — the Shanghai Composite only reached a two-year peak and its 6.6% advance in 2017 was in the bottom third of performances among 96 primary indexes tracked by Bloomberg.
This matters because the narrative drummed into everyone’s consciousness during the most-recent leg of the global rally was that a synchronized pickup in growth was the reason to relentlessly bid up stocks and sell down volatility.
The underperformance of China — the world’s biggest exporter and the largest market of consumers — casts doubt over that optimistic story.
Through the start of 2018, it looked as if the country’s shares were playing catch-up to validate the global meltup, only to start dropping well before the Feb. 2 U.S. wages print supposedly let the inflation genie out of the bottle. Looking forward, there are even fewer reasons for optimism: the lack of obvious organic Chinese drivers means any rallies can be viewed as merely aping global trends, making them just as vulnerable as last time.
China’s Communist Party made it clear that it’s determined to shift to a more stable, steady growth profile; a direct contradiction of the frenzied global stock rally that was pricing in perfect outcomes and was turbo- charged by the short-term sugar hit of deficit-fueled U.S. tax cuts.
The deleveraging that’s central to China’s plans has to entail a slower growth profile. It’s also delivered the highest nominal 10-year yields since 2014 and brought real yields close to the highest since 2009. All three of those factors undermine the case for strong equity gains from here.