PBoC Surprises, But Not In The Kindest Way For Risk Sentiment

Markets

Another volatile day on Gold exchangeWall Street left investors reeling and utterly dazed and confused as bonds sold off sharply, extending last week's declines.

A massive selloff in USTs on Monday was led by the belly ahead of a fully priced 25bp Fed rate hike later this week. US 10y yields cruised through the critical 2.07% while spreading rate hike fever across the board.

It's hard to add large shorts at the lows, but rallies from here are likely to be shallow, with any uptick likely to provide better levels to get short into.

The S&P 500 has fallen below 4200 support, and there is plenty more dispersion below the surface.

The pullback in Tech/higher beta Growth is relatively broad as rates move higher again. The retreat in Energy is obvious with the Crude oil rally slip-sliding away. China Tech and ADRs remain under very capitulatory pressure rounding out the global risk-off tumult.

The PBoC surprised, but not in the kindest way for risk sentiment 

The People's Bank of China refrained from supporting economic activity and investor sentiment via a rate cut, making a net CNY100 bn injection via the 1y MLF but keeping the rate unchanged at 2.85%. The lack of a rate cut is astonishing in the context of weak lending growth, HY credit weakness, multi-city COVID lockdowns, and a deepening real estate slowdown.

The PBoC, however, might be looking to boost exports. A second consecutive daily USD/CNY fix above the consensus estimate—i.e. weaker CNY—suggests a growing propensity to lean on external demand. The lack of a rate cut also means that the PBoC is focused on a RRR cut that could materialize imminently. In the meantime, China-sensitive assets, including CGBs, HK equities, and the AUD, look set to underperform.

China for India?

I am fielding lots of questions about where the money that is leaving China is ending up. With KOSPI and TAIEX roughly unchanged and Nifty+1.5% overnight, India continues to be the leading answer to this question, while North Asia is holding serve.

That being said, a very expensive Indian market has global investors wary of jumping on board, so I would imagine a lot of money is still sitting on the sidelines until risk-off winds down. Tough to say at this point when that will be with negative COVID and supply-chain headlines likely still sitting ahead of us.

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