Euphoria Sweeps China Stocks as Signs of Covid Zero Pivot Emerge
Comment of the Day

November 11 2022

Commentary by Eoin Treacy

Euphoria Sweeps China Stocks as Signs of Covid Zero Pivot Emerge

This article from Bloomberg may be of interest to subscribers. Here is a section:

Traders who have for long been seeking clear signals of a pivot away from the staunch Covid Zero policy cheered the slew of changes announced on Friday, which included a cut in the amount of time travelers and close contacts must spend in quarantine, and a pullback on testing. The decisions by the National Health Commission followed a meeting by the nation’s top leaders on Thursday, where a more targeted approach was encouraged to tackle outbreaks.

“This is a huge positive for the market,” said Wang Yugang, a fund manager at Beijing Axe Asset Management Co. “Of course how much efficacy these measures have for the economy we will need to observe.”

In a display of broad market optimism, every stock on the 50-member Hang Sang China gauge was up on Friday. On the mainland, the CSI 300 Index ended 2.8% higher.

Eoin Treacy's view

The Chinese government is wrestling with the opposing challenges of rising cases and the slowdown in the economy. The reality is quarantines cannot stop the spread, only slow it down, when COVID is endemic everywhere else. At some stage China will have to grasp the nettle and tolerate higher numbers of infections for longer. How willing they will be to tolerate millions of cases a day remains an open question. Of course the answer, supplied by India’s experience, would be to simply stop counting.

It is often said that Dr. Copper is one of the most reliable indicators of global economic health. It might be more useful to think of copper as a Chinese doctor. The price has rebounded emphatically over the last two days and is now back above the 200-day MA. That’s sufficient grounds to believe a medium-term low is in.

The entire basis for a secular bull market in copper is based on outsized demand growth from the renewables sector as decarbonisation becomes an increasingly powerful global priority. The primary detraction from that argument is China is the biggest consumer and processor of the metal. Without stable demand in  China, prices cannot improve. Therefore copper is most sensitive to renewed enthusiasm for Chinese economic recovery.
The possibility of China opening up, even partially, is clearly bullish for oil demand too. The price has rebounded over the last couple of days but has not yet broken out of its tight $10 range which has been forming over the last couple of months.
The weakness of the Dollar raises some important issues for the global inflation question. The stock market has rebounded on the expectation the peak of the interest rate hiking cycle is approaching. However, if the oil price breaks higher that is going to put additional upward pressure on the inflation rate even as the Dollar also makes imports less competitive.

By the same token, the strength of other currencies relative to the Dollar should temper inflationary pressures and boost domestic growth potential. That suggests there is clear scope for ex-US markets to outperform in a weak Dollar environment.

The Hang Seng China Enterprises Index is rebounding to at least unwind the short-term overextension relative to the trend mean.

The Nifty Index is back testing the 2021 peak, having found support in the region of the 200-day MA in October.
The Europe STOXX 600 closed back above the 200-day MA this week and is now challenging the yearlong sequence of lower rally highs.

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