A 'Made in China' global stock markets crash!

 

A Made in China global stock markets crash!
Shanghai A shares is not a liquid, valuation driven, institutional flows based, regulated stock market like London or New York.

Beijing has joined currency wars, writes Matein Khalid

By Matein Khalid/Wall Street

  • Follow us on
  • google-news
  • whatsapp
  • telegram

Published: Sun 10 Jan 2016, 11:00 PM

Last updated: Mon 11 Jan 2016, 9:06 AM

This was the ghastliest week for global risk assets since September 2011. Not even 290,000 new US jobs in December could negate the raw fear on Wall Street generated by the 10 per cent fall in Shanghai, a yuan depreciation, market meltdowns of six-seven per cent in Tokyo, Hong Kong, Frankfurt, Mumbai and New York. Four months ago, I had published a KT article titled "History's first Made in China global recession". Last week the financial markets vindicated my fear.
The end of two term US Presidents terrify me. In 1990, the Reagan bull market morphed into the post-Kuwait war bear market and banking crisis. The bull market of the Clinton era blew up in the 2011 Silicon Valley tech bust and Enron/Pentagon/9/11 bear market. The end of George W. Bush's eight years in the White House culminated in Lehman's failure and the crash of 2008. Now Obama's eight years on the world stage will end and Mr Market has the worst first week risk spasm since 1932 at the height of the Great Depression. Black swans? North Korea. Venezuela. Daesh. Boko Haram. Donald Trump. The Queen's at Ascot, the Tories are in power but all is not well with the world.
China's economic slowdown is not new news so the Shanghai/Shenzehn crash had more due to flawed securities/circuit breaker policies and liquidity shocks. As usual, the Communist Party responded to market chaos by banning strategic sales. Wicked. The Deng/Mao/Xi version of Red Robber Chopsticks capitalism. Let a thousand thugs bloom. Shanghai A shares is a retail casino, not a real, liquid, valuation driven, institutional flows based, regulated stock market like London or New York. In any case, non dedicated funds fled China after the August crash. The smoke signals from the Politburo and investor herd psychology, not corporate profits or even central bank profits, will determine the fate of the Shanghai stock markets. Any fund manager still overweight emerging markets since 2011 should seek a new career as a circus clown or a shawarma grill operator. This much, at least, is certain, even in Magic Kingdoms and Magic Planets.
China's credit crunch means investment Armageddon in sovereign junk credit, emerging markets and commodities. After all, it was no coincidence that Brent/West Texas crude dropped 11 per cent last week. I was at a CFO conference last year where the CFO's in the audience all voted that oil would trade in a $50-60 range. Poppycock, I pleaded from the panel stage $20-30. The room roared with laughter. Wonder who is laughing now? Not me, since I know so many of these investors will haemorrhage cash in 2016.
The yuan decline only demonstrates that China has joined the global currency wars. In the 1930s, this was called "beggar thy neighbour devaluations" - and China's trade neighbours are Taiwan, Japan, the Republic of Samsung and China's ally is the nuclear armed House of Kim.
The Chicago Volatility Index is at horrific 26 and Wall Street's pendulum of greed and fear (not my friend CLSA's Chris Wood's blog!) tells me that US equities are grossly oversold. It is surely significant that the three and six month volatility futures trade below 10. Of course, I realise that the technical violations, breadth and lack of sector leadership are all negatives for the "buy on dip" arguments.
Donald Trump's 45 per cent tax on Chinese imports is so stupid that I cringe that he is a fellow Wharton alum. Compared to Trump, Ted Cruze is a raving socialist. I believe Cruz will get the nomination but, as in 2008 and 2012, The GOP will lose in a landslide to the Democrat's anointed queen Hilary Clinton, the 45th President of the United States.
The 2009-15 Obama bull market saw the S&P500 index triple in value. US equities were slammed in 2015 by pressure on earnings and King Dollar could now pressure margins. I expect the S&P 500 to test August lows near 1867 and then make a bid to take out supply at 1975. If any of the dethroned FANG's (especially Amazon or Netflix) miss earnings, watch out. Fund managers are now like Victorian surgeons, when in doubt, they cut it out.



More news from