Targets
One of the most important piece of data being reported this week is Chinese money supply. When giving a little thought to the meter, it gives a negative impulse to the markets turned both ways. If the growth continues we have asset bubbles forming and inflation threat; If growth slows down we have a threat that China investment driven economic model collapses globally subdued demand for everything China imports. I will be interesting to see how the markets will react, in my view it could only be negative.
Interesting exercise David Rosenberg made yesterday in Gluskin Sheff economic commentary:
Since the onset of the credit crisis in 2007, there have seen three occasions when a surge in risk aversion caused a period of U.S. dollar strength on flight-to-safety trades — July 15, 2008 to September 11 2008 (around the GSEs); September 22, 2008 to November 21, 2008 (post-Lehman financial collapse) and then from December 17, 2008 to March 5, 2009 (the final leg down in the financials). Here is what happened, on average, during these dollar-rally episodes — ultra-defensive strategies and heightened volatility:
- The DXY (U.S. dollar index) rallied an average of 12.3%.
- During these episodes, the Canadian dollar sank 11% against the U.S. dollar, but was only down 1.9% against a basket of non-U.S. currencies.
- The S&P 500 corrected an average of 18.5%. Underperforming S&P equity sectors included materials, energy, industrials and financials. Outperformers included utilities, staples, health care, tech and telecom.
- Despite the downdraft in commodities, the TSX performed in line with the S&P — losing 18%.
- In the TSX sectors, the winners and losers were different than in the U.S.A.: Financials and industrials actually outperformed. Only materials and energy seriously dragged down the Canadian market. As in the U.S., staples, health care, utilities, tech and telecom outperformed. Outside of resources, the TSX sectors actually outperformed their S&P comparable.
- Still, it pays to note that we are talking about “relative” performance. Every equity sector on both sides of the border was down during these periods.
- The oil price, on average, fell 26%, and gold was off an average of 11%. The CRB index corrected an average of 22%.
- The VIX index surge an average of 34% during these U.S. dollar-rally episodes.
- We saw a bull steepening in the bond market — 2-year T-note yields plunge an average of 36bps while 10-year T-note yields dipped 8bps.
- Baa corporate spreads widened an average of 54bps; and by 268bps for high-yield bonds
This would mean i.e.:
- DXY reaching 83.7 which translates into +4.1% to go.
- S&P 500 reaching 937 points which translates into -11.3% to go.
- Gold reaching 1190 USD/oz which means that we passed this point by 2.5%.
- Crude oil reaching 61.4 USD per barrel which translates into -14.6% to go.
- VIX reaching 23.5 which means that we passed this point by 13%.
For the time being those numbers seem like decent targets.
China, China Money Supply, Crude Oil, David Rosenberg, Gold, S&P 500, U.S. Dollar, VIX