Wednesday, March 16th Was A Very Big Day

1645 words – a 4 1/2 minute read.

I learned early on in my career as a sell side strategist at Morgan Stanley that one can give a date and one can give a level but one should never give a date & a level – thanks Byron. Another great piece of advice from the MS macro team of the day, this one from Barton Biggs: the news doesn’t have to be good, just less bad.

With some of the wildest volatility I can recall in my 30 + years of global investing it is cliché time for sure. Maybe because cliches contain an element of truth - otherwise they wouldn’t have made it to become a cliché.

I don’t think I will violate either piece of advice by stating that Wednesday was a very big day for global investors – so big that I think its ramifications will only settle in over time. Here then is my on the ground, up to the minute, read on what is happening. Cheat sheet – its very positive.

It takes a lot to sweep the Fed off the front page – especially on the day it kicks off a rate hike cycle for the first time in almost 4 years. Yet that is what China’s multiple announcements (BBG link) did on Wed, sweeping the shorts out to sea (KWEB up 40% on the day… 40%), giving the bulls some hope and taking out all the oxygen for the Fed’s headline act (reminds me of watching Lynyrd Skynyrd as the warmup band back in the 70s leave the audience spent for the headliner). Here are the highlights from Fintwit:

*China pledged to keep capital markets stable

*Vowed to support overseas stock listings

*Said dialogue with US re ADRs is 'good'

*Promised to handle risks for property developers

*Clarified regulation of Big Tech will end 'soon'

*BOOM....

Boom indeed. China’s moves, momentous as they were, was just the first big move of the day; the second was the Fed announcing its 25 bp rate hike and more importantly setting out its new rate hiking path and economic forecasts. Keep in mind the Fed had not met since late January, which might as well have been last century. This was a mark to market meeting for the Fed – it is now lined up with the market on hikes this year - fixed income volatility should ebb considerably.

The third key moment of the day related to the conflict in the Ukraine & reports which suggested that there was room for negotiation on a possible ceasefire. We wrote last week that time was not Putin’s friend - something that rings only more true a week later. Bogged down militarily with the Ukrainians mounting counteroffensives, witnessing continued political protest across society ( NYT reports 14k arrests sine 2/24)  as well as his own State media and seeing major Russian companies cease production due to lack of parts, sending thousands home… makes you wonder what next week will bring. I think it could be a deal.

Wednesday cleared away 3 levels of uncertainty in one fell swoop – what would China do to arrest the collapse in its equity market, what would the Fed do and how does it see the rate hike cycle ahead and is there any hope for a near term resolution to Russia’s invasion of the Ukraine.

Not surprisingly we have had a pretty significant risk asset rally as the cross asset volatility storm ebbed. The VIX finally broke under 30 after some 11 days above it – the history of subsequent US equity action is quite bright. The UST volatility indicator, the MOVE index, likewise fell under 100 to its lowest level in over a month. The Commodity space, whiplash central the past few weeks, also seems to be stabilizing with EU Nat gas, Crude oil, wheat etc. all down considerably from their spike highs (EU Nat gas is off 70% for example).

Now we have the phone conversation this morning between Pres.’ Biden & Xi. I think this could be a very big deal as well. Here is the US view going in: 

 The president will call on China to use its influence over Putin to urge Russia to end the war, Deputy Secretary of State Wendy Sherman said on MSNBC on Friday. 

If Xi, “wants to be a true leader on the world stage,” he will side with Ukraine and the U.S., she said. “We will see whether in fact Xi Jinping makes the right choice here.,” Sherman said. “His future is with the United States, with Europe, with developing countries around the world. His future is not with Russia and Vladimir Putin.”

China can build on its efforts to reestablish 2022 as a year of stability by helping bring Vlad to the table. Xi saw what “uninvestable” meant for Russia and what it meant for China tech in a matter of days. Wednesday, China & Xi choose growth, the markets, foreign investors & opened the door for this call. China has tried to walk a fine line between supporting Russia and maintaining its orders of magnitude bigger economic relations with the 100+ countries lined up against Russia’s invasion. It’s decision time & China has already made its decision.

It's really the only call for Pres. Xi who is focused on getting his 3rd term in office this Fall. If Russia had walked into the Ukraine and Ukraine folded Xi would have been fine with that – no doubt. But that didn’t happen and now its recalibration time. Rumor has it that Russian Foreign Minister Lavrov was in the air en route to China when news broke of the Biden – Xi call – his plane turned around. Hopefully Pres. Biden, who together with his staff and the US military – intel complex have done a superb job so far, will say to Pres. Xi: now is the time for China to step up on the world stage and help bring peace… war helps no one – your economy needs to grow or else you will have political problems – same with us – lets work together to solve this problem.

Nothing is baked in stone but our read is that the focus can now begin to return to a solid global economy, one benefitting from reopenings across America and Europe as well as Asia as Covid fades and becomes endemic. Yes, I know cases are surging in S Korea and parts of Europe but there is no call for more lockdowns and even China has reopened parts of Shenzhen and Shanghai. Dr. Copper has hit new highs, the A$/Y cross has broken out to new highs, long rates are rising, economic data is strong across Asia, Europe and the US, China is easing. 

Recession forecasts in Europe and the US are not worth the paper they are printed on. The ECB’s new, post invasion, forecasts see Europe growing at 3.7% this year and 2.8% next vs pre Covid 5 yr. av under 2%. Consensus US 2022 GDP growth is roughly 3.5%, the Fed came in at 2.8% and Powell had to walk that back. Pre Covid average US GDP growth was 2.3%. Nominal growth in both will be well, well above pre Covid levels – maybe double, and yet EPS estimates are for single digit growth…. a very low bar indeed. Expect China to come through with concrete policy actions to support growth – it already cancelled a property tax and has cut rates – look for more such action. It is even relooking at the Zero Covid policy and its economic effects.

Our Tri Polar World framework of regional integration in Europe, Asia and the Americas has stood us in very good stead these past few months. It informs the opportunities we wrote about last week: Europe, from both a tactical and strategic POV, trading at 12x forward PE & the hi beta, disruptive tech names that will be the biggest winners from a Fed that is intent on NOT breaking things. I note that ARKK is now up 20% from its recent low – have you seen the bull market headlines – don’t hold your breath. Along similar lines, JPM managed a rare feat of both cracking the China tech sector with a report headlining China tech as “uninvestable” while coming out three days later saying buy hi beta. Pretty neat trick; I agree with the latter and believe the former marked the bottom in China tech (KWEB up 50% off its 3/15 low as I write) – we are long in our Global Multi Asset (GMA) Model.

While time & technical work are needed to support further appreciation, sentiment and positioning are both very supportive while the S&P has had its mid term correction albeit via the 4th worst start to the year in history. Quarter end rebalancing should support equities with JPM expecting a $230B inflow to stocks from bonds as should buybacks. And the areas of opportunity just keep growing – Europe, disruptive tech, now China at 9x forward PE and don’t forget gold. Kevin Muir, of Macro Tourist fame, laid out a very compelling gold case this week, building on the impact of Russia’s CB reserves being frozen and positing what might happen if China, worried about such given its huge USD reserves, decided to allocate 25% to gold (3% allocation currently). Because he is such a great guy (and Canadian to boot) he provided us with the piece to read. I suggest you do exactly that. Note, our GMA has a nice position in the gold miners.

It has been an incredible few weeks in the markets – a marathon run at a sprinters space. I am pretty energized and hope you are too!

 Finally, please sign up for next Wednesdays’ Webinar hosted by the good folks at Tellimer. I just finalized the chart package – its pretty good if I do say so myself.