The China’s power crunch concern
“I think we’re a lot more concerned about the Chinese power crisis than the Evergrande issue because… this has serious implications,” Rajiv Jain, chairman and chief investment officer at GQG Partners, said on Wednesday.
According to Jain, GQG Partners began reducing its exposure to China in its emerging markets equity fund in late 2020 or early 2021. Meanwhile, as economic growth outside of China picked up, the fund increased its holdings in India, Brazil, and Russia, according to Jain.
“We believe there is a little too much emphasis on the growth aspects in China, while other markets appear to be recovering… and that is where we will find opportunities,” said Jain.
The fund’s top holdings in emerging markets include the world’s largest foundry, Taiwan Semiconductor Manufacturing Co or TSMC, the Indian IT services firm Infosys, and South Korea’s Samsung Electronics.
China’s energy crisis
According to Jain, the effects of China’s energy crisis could reverberate through global supply chains, further disrupting consumer goods supply and causing inflation to rise.
Already, global supply chains have been strained as a result of the Covid-19 pandemic and shipping disruptions, which have limited the supply of goods ranging from apparel to semiconductors.
According to a top fund manager, China’s power shortage is a greater concern than Evergrande.
China is experiencing an energy crisis. According to Jefferies, here’s how to trade the market.
That kicked off national and local plans to reduce production of coal and other carbon-heavy processes.
Goldman Sachs and other economists have slashed their growth forecasts for China as the energy crunch hit the country’s key manufacturing sector.
In comparison to the power crisis, the debt crisis at Chinese property developer Evergrande will most likely be “very well contained,” according to Jain.
“The vast majority of the debt is domestic, and I believe it can be parceled out to smaller entities and absorbed by others… “You’ve seen that movie before, and obviously, authorities are very adaptable in dealing with this,” he said.
Evergrande has more than $300 billion in debt and has struggled to raise funds to pay banks, suppliers, and investors.
Looking at the Dow Jones as September ends
The Dow Jones has topped right around 4,380 since the first hour of trading Monday morning, lending some tactical significance to a level that corresponds with a clustering of options dealers’ exposures. When larger macro/corporate drivers are at bay, such things exert a pull over shorter time frames.
Stock traders reacted negatively to reports that Sen. Manchin is willing to go up to $1.5 trillion in total fiscal additions, compared to Biden’s $3.5 trillion, indicating that the path to a deal remains obstructed. The dollar amount isn’t the issue; this is a ten-year deal with modest annual payments. It is a question of whether a deal and debt-ceiling increase can be completed in a reasonable amount of time.
Last week’s failed bounce ended right at the first upside “test” level, which is unusual for a market that typically bounces quickly. Now less than a half-percentage point above last week’s low, as well as the 100-day average. Is it testing time?
September is what I call a reset, and it has been a thorough one: The Dow Jones has now spent the majority of the last two weeks below its 50-day moving average. It hadn’t spent more than a day there before this in 2021. Half of all Nasdaq stocks are down at least 20%, while half of all S&P stocks are down 10%. The Big Five largest stocks are down nearly 10% on average since their peak. The Dow Jones has returned to levels last seen in the first few days of July. Even as we await the year’s first -5 percent close from a record high, the correction has been ongoing for some time.
This isn’t to say it’s over or that it can’t get any deeper. Even after a weak September, October can be difficult in up years. Earnings forecasts for the third quarter are being reduced, and the reporting season should be a shambles due to supply issues and the August delta effect.
But the work that many said needed to be done a month ago – the monotonous S&P uptrend seemed too easy, the rotations too scripted, indexes were ignoring poor underlying breadth, and sentiment was too complacent – is finally being done. So far, nothing has disproved the notion that this is yet another – albeit erratic and perilous – rotation back toward cyclical groups.
Sentiment has undoubtedly become frustrated and cautious. Looking ahead, that’s not a bad thing. This week, AAII retail-investor bears have risen above 40%. The NAAIM professional traders have reduced their equity exposure to near-term lows in 2021.
Speculators in retail options have slowed. Volumes are still higher than pre-Covid levels, but the pie is smaller. This has been a key source of upside energy over the last year and a half, particularly in technology and “concept stocks,” as well as a nudge to the overall markets as options dealers hedge by purchasing shares/indices. Although we cannot declare the mania over, it is interesting to note the shift in tone here.
There has been a pattern of buying bursts to begin each quarter, so we’ll see if that continues tomorrow. It remains true that in bull-market years, the year’s peak would be unusual if it occurred on September 2. And the raw material for fourth-quarter relief is frequently September-October anxiety. That is the most basic scenario.
However, it is impossible to ignore years such as 2015 and 2018, when a combination of economic slowdown and perceived too-tight Fed policy resulted in tougher year-end results.
Yields are easing slightly, but this is not a major flight to safety or a serious slowdown warning. Credit markets are still relatively stable.
Market breadth is negative on the NYSE but positive on the Nasdaq (quarter-end reversion effect, buying laggards with yields soft).
The VIX is rising in response to the intraday drop in stock prices above 24. Denying bulls a “all clear” decline while also failing to register any type of climactic panic near last week’s highs (28-ish). On high alert, but not particularly concerned.
It’s difficult to say whether a true retest of last week’s low is required or whether it’s too soon for a proper retest. We still haven’t closed down 5% from a high in nearly a year, so this is pretty routine. Any bounce will be a “show me” proposition unless/until it decisively clears 4,450 at this point.
It’s possible that this is a benign prolonged shakeout that will set up some fourth-quarter strength, but it could also go longer/deeper before it’s done.
Treasury yields are easing today, providing some (fleeting?) relief for big growth/tech. (As previously stated, the inverse relationship between Treasury yields and tech stocks is not intrinsic. It’s “working” right now, but it’s not a natural law or a historically consistent pattern.)
There is a tangle of story lines behind the recent action that aren’t coming together to form a convincing explanation: –
Yes, policy uncertainty dampens investor sentiment, but market action does not fit with risk aversion/debt-ceiling fear (cyclicals leading, bonds selling off).
-Evergrande was a problem for months that received all of the blame for a one-day drop a week ago, but it never caused credit stress.
-The overseas shortages/energy pressures are real, but it’s worth wondering how much supply-chain friction has been factored in with Sherwin-Williams shares rising today on another margin warning.
-The prospect of a GDP slowdown is on everyone’s mind, and third-quarter earnings forecasts are falling. Nonetheless, delta cases are rolling over, economic data surprises have firmed, and stocks that are “reopening” are outperforming.
a larger picture Another bout of fitful, messy style shifts from secular growth/defensives to cyclical/reflation areas appears to be underway – but in a seasonally weak month when investor equity exposures began at historically high levels and the low-volatility grind through August lulled traders into deferring to the sleepy uptrend.
Close to half of all Dow Jones stocks are down at least 10% from their highs, which is a good start. Fewer than one in every seven Nasdaq 100 stocks opened the day above their four-week average price, indicating a short-term oversold reading. Over the last few days, we’ve seen an increase in the purchase of downside protective put options. All indications are that much pain has already been taken, and concern is rising, which is a good thing.
The big question in this latest choppy phase has been whether retail traders will reload on their bullish call-option bets, which have been a key driver of some rally dynamics for over a year. There are some indications that this activity has slowed recently. HOOD shares don’t behave well, though this is sometimes a proxy for crypto, and meme names have been mediocre. This, however, could change very quickly.
In the midst of the frenzy over “buy now, pay later” apps and M&A, with Affirm and SOFI hyping their “super-app” potential, fintech as a group has recently flagged vs. traditional banks.
Today’s market breadth is mixed, with the volume split roughly 50-50, though the advance/decline ratio for NYSE stocks is strong at 2:1.
Despite a sleepy/range-bound index day so far, the VIX remains in wait-and-see mode, not giving up much juice.