Recession Prediction: The Reason Behind the Scare
By: Steve Smith
Nonetheless, Chinese (& Asian) Equities STILL sold off…so after the close, the PBoC announced FURTHER easing measures (as they go outright “kitchen sink” route), 1) cutting the SME loan relending rate, 2) making SME loans eligible as MLF collateral and 3) increasing the SME loan relending quota. Geez.
But the most obvious “easing” tool for the PBoC looks to be the Yuan, in large part due to the escalation of “trade war” tensions. The current 8 session weakening in offshore CNY vs USD (3.1 Standard Deviation move) is the largest since the “devaluation” shock of Aug ’15. For this reason, we are seeing a demand for equities index options downside trades, cheapened significantly by contingent CNY weakening (hit me for more details).
LARGEST WEAKENING IN YUAN SINCE THE PBoC SHOCK DEVALUATION OF AUGUST 2015
Source: Bloomberg
An escalation of / persistent weakening in the Chinese Yuan has potential to trigger a global “disinflationary impulse” via the supply-chain and contributing to further USD upside as a headwind to EM, Commodities and U.S. growth. As such, we see that over the past five sessions, the five weakest EM currencies tracked by Bloomberg are Asian: CNY, IDR, TWD, KRW and THB.
This “rolling EM meltdown” is another expression of the “QE to QT” reality, as the “easy carry” environment of the post-GFC period now “coming home to roost” in the form of “skinny exits” for redemption flows. Last week EEM saw it’s largest weekly outflow (-$3.0B) ever, while MSCI EM Equities futures also saw a monster -$2.8B outflow combined across Asset Managers and Leveraged Funds—a -3 standard deviation move. For some context however on how much more “room to go” there is with potential EM “capitulation ahead,” look at this chart of the current outflow vs the 14 year inflow:
YOU ARE HERE—EM EQUITIES AND DEBT FUND FLOWS OVER THE PAST 14 YRS:
Source: Bloomberg
Related: 36 Fundamental Rules of Investing