The Shanghai composite index has now given back all of its year to date gain with a 4th day of losses and by .8% overnight. The close was last seen on January 19th. Iron ore fell another 5% to the lowest close since October. Out of all industrial metals, this is easy to get out of the ground and there is so much supply and thus has always been the least attractive from an investing standpoint. Copper is up slightly after a 5.5% three day loss. The Journal of Commerce index closed at the lowest since January and is now 4% off its recent peak. I’ll exit stage left after being bullish on the group for the past year and a half as China is a real wild card now. The index is still up 30% y/o/y. The rate markets did calm down overnight as the 7 day repo rate fell 86 bps and is back to where it was last week. The 10 yr yield was down 1 bps off the highest level since August 2015. Overnight SHIBOR was down slightly but you can see in this chart what its done over the past few weeks.
Here is the new story on China’s desire to crack down on excessive credit growth: Shanghai Securities News has a story today titled “Local regulators to carry out on-site inspection and implementation of three sets of four improper governance.” Again, I’m using Google translate. Investment by lenders, wealth management products and interbank businesses will all be under greater scrutiny. The crackdown is beginning to work as Bloomberg is reporting that “the number of wealth management products issued by Chinese banks slumped 39% in April from the previous month, while trust firms distributed 35% fewer products, according to data compilers PY Standard and Use Trust. Sales of negotiable CD’s tumbled 38% from a record.” There is no question these steps are desperately needed but the withdrawal process is always disruptive and painful on an economy that is so dependent on them.
Bottom line, the liquidity spigot is shifting this year as there is now less coming out. We can analyze the economy, earnings, politics, tax reform, etc… all we want in our research on stocks but the #1 focus should be the path of liquidity with valuations as rich as they are. We know valuations don’t matter until they do but they start to matter when the central bank flow of easing starts to moderate, however slow the process is.
In addition to the US payroll report where upside is very possible to the estimate for the sole reason that March was so weak at just 98k, we get flooded with Fed speak by Fischer, Williams, Rosengren and Yellen. Yellen is speaking at an event commemorating “125 years of Women at Brown” so it will be unlikely she tells us what she’ll do on rates in June.