Shanghai Comp’s Slow Bleed, BoJ, UK and more…

Chinese markets continue their slow bleed. The Shanghai comp closed at its lowest level in almost two months (and still down almost 50% from its 2007 bubble peak). Year to date it’s lower by 12%. The H share index ended the day down 1% and is lower by 4% year to date. Tightening credit, higher US interest rates and the weaker yuan, home buying restrictions, and wealth management products getting hurt on the selloff in Chinese bonds are some of the reasons for the weakness. With respect to WMP, their size is 26 Trillion yuan or about $3.7 Trillion in dollar terms. About half of this money is invested in bond and MONEY markets. Their cost of funding is going up and the things they are buying are going down. Here is a chart on the Chinese 10 yr bond yield:

The BoJ did nothing as expected and Kuroda can sit back and relax as he watches the Trump trade take his yen lower. He can’t relax too much though as we head to 2017 because the bond market is already testing his ‘yield curve control’ experiment and we should expect more tests. As the rise in interest rates has been a global phenomenon, Kuroda is essentially fighting the world in trying to keep the 10 yield at or near zero. At some point next year, Kuroda may be forced to lift the zero target which would be cheered by its banking system. No hint of that overnight however left the Topix bank stock index down by 1% after yesterday’s 1% drop. The yen also fell as a result which helped lift the Nikkei by .50%.

Following a good November retail sales read (thanks in part to Black Friday) in the UK, the CBI retail sales index jumped to 35 from 26 and that was 15 pts above the estimate. It’s also the best since September 2015 and CBI said “the growth of retail sales volume was broad based, with sales of clothing continuing to perform strongly and grocers reporting the best results since January 2016. Internet sales volume continued to rise at a robust pace…with the survey balance at its highest since November 2014.” The question is sustainability as CBI also said, “With higher inflation beginning to weigh on households’ purchasing power, consumption patterns are likely to shift, creating winners and losers across the retail landscape.” Someone is going to have to absorb the 13% y/o/y gains in input prices.