China Outperforms the Rest of the World
Far and away the most notable market event over the past week has been the historic surge in Chinese equities. As we discussed in today’s Morning Lineup, the Shanghai CSI 300 has gone from a 52-week low to a 52-week high in only a couple of weeks thanks in part to a record over 25% rally in the past five days alone. Significant stimulative monetary policy, which we dedicated multiple pages in Friday’s Bespoke Report to discuss, has sparked the advance
The superlatives, however, don’t stop there. In the matrix below, we show the performance of the ETFs for 22 major global economies featured in our Global Macro Dashboard (which was most recently updated last Wednesday). As shown, Chinese equities, as proxied by the MSCI China ETF (MCHI), are now up close to 26% since September 13th (the date of the CSI 300’s 52-week low). In that same span, Hong Kong (EWH) has risen in sympathy with a 17.5% gain, but the third best-performing country – South Africa (EZA) – hasn’t even seen half of those gains. Other than China and Hong Kong, Australia (EWA) is the only other international market starting the week at a 52-week high. While the run in Chinese stocks is a high bar to be compared to, the rest of the world has at least generally seen positive performance. Only two countries are lower since mid-September: Brazil (EWZ) and Mexico (EWW). As such, most countries are also currently overbought with China and Hong Kong doing so to a record, off-the-chart degree.
The charts below show MCHI and the degree to which it is overbought by two measures. The first (middle chart) is the 14-day RSI, and the second (third chart below) is the number of standard deviations from its 50-DMA. As shown, after the rally of the last couple of weeks, the ETF has erased all of the losses since February 2023. For RSI, typically any reading above 70 could be considered “overbought”, but today that index is over 10 points higher. The only time the RSI was more extended was in the spring of 2015. Meanwhile, there has never been a point since the ETF’s inception (2011) in which it has been more extended above its 50-DMA. Last Tuesday MCHI traded over 5 standard deviations above its 50-DMA.
Bespoke’s Morning Lineup – 9/30/24 – China’s Unbelievable Rally
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“What is time? Swiss manufacture it, French hoard it, Italians squander it, Americans say it is money. Hindus say it does not exist. Know what I say? I say time is a crook.” – Truman Capote
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
US equity futures are modestly in the red to kick off the week. That follows a poor start to the week for European markets as well. In Asia, most major benchmarks were also lower to start the week with one big exception. Chinese stocks have continued their gangbusters rally ahead of the week-long holiday where markets will be closed until October 8th, and it appears as though a rush to cover shorts ahead of that closure sparked a frenzy in that country’s stock market.
Look at the chart below because you may not see one like it again, at least for the stock market of the world’s second-largest economy. As we noted on Friday, China’s Shanghai CSI 300 went from a 52-week low to a 52-week high in less than two weeks, and as unbelievable as that rally was, it followed through on that run with a gain of over 8% to kick off the week. Again, charts like this may not be impressive for an individual small-cap stock, but the CSI 300 has a market cap of over $7 trillion.
Last night’s gain in the CSI 300 was the largest in more than 15 years, and there have only been three other days since China entered the WTO that the index had a larger one-day gain.
As mentioned above, last night’s rally capped off what had already been an impressive run for the CSI 300, and the index has now traded higher for nine straight trading days. That’s tied for the second-longest streak of daily gains on record trailing only the 12 gain in December 2014.
This next chart could be the most unbelievable of them all. The CSI 300 has surged just over 25% in the last five trading days. No other five trading day period since 2002 even comes close.
What’s most ironic about the last five days of gains is how much Chinese stocks still are in the hole. From the post-COVID high in February 2021, the CSI 300 remains in a drawdown of over 30%, and the index is still down modestly relative to where it was two years ago and essentially unchanged over the last five years.
Brunch Reads – 9/29/24
Welcome to Bespoke Brunch Reads — a linkfest of some of our favorite articles over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
The Sphere:On this day last year, The Sphere officially opened its doors with U2. The iconic 366-foot-tall structure dazzled audiences with its massive 580,000-square-foot LED screen, providing an immersive visual experience unlike anything before it. Inside, the Sphere’s state-of-the-art sound system and 4D effects wowed concertgoers, solidifying its status as a game-changer in live entertainment. In just a quick year, the Sphere has hosted many concerts, films, and even UFC 306, a one-and-done sporting event that changed how sports and entertainment could be blended like never before. We’re excited to see what’s to come after just one year filled with viral moments.
Energy
Powering Up: The Surging Demand for Electricity (KC Fed)
After years of flat growth, US electricity demand has started to climb, growing 1.3% annually over the past three years, more than double the rate from 2010 to 2019. This uptick is largely driven by commercial demand, particularly in states like Virginia, North Dakota, and Texas, where data centers are booming. Projections suggest this surge will continue, with forecasts for 2024 and 2025 showing big jumps. The rise of AI and data center expansions, alongside trends like clean energy investment, are key factors pushing demand higher. As the US economy becomes more electrified, there will likely be a greater need for investments in energy infrastructure to keep up with this demand and ensure sustainable growth. [Link]
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The Bespoke Report – 9/27/24 – The China Solution
To read our weekly Bespoke Report newsletter and access everything else Bespoke’s research platform has to offer, start a two-week trial to Bespoke Premium. This week we look at AI stock performance after Micron (MU) earnings this week, the huge week for policy in China, central bank activity around the world, a strong backdrop for the consumer despite weak sentiment, falling inflation, developments in commodities, and renewables stocks.
Daily Sector Snapshot — 9/27/24
Bespoke’s Matrix of Economic Indicators – 9/27/24
Our Matrix of Economic Indicators provides a concise summary analysis of the US economy’s momentum. We combine trends across the dozens and dozens of economic indicators in various categories like manufacturing, employment, housing, the consumer, and inflation to provide a directional overview of the economy.
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Higher Interest Rates???
With all the talk leading up to last week’s rate cut, it became a forgone conclusion that interest rates would fall. People forget, however, that the Federal Reserve only has control over the short end of the yield curve, and as one moves further out on the curve, the Fed’s control diminishes. At the long end of the curve, rates haven’t declined; they’ve actually seen relatively large increases. The chart below shows how much 10-year yields moved in the days after the first cut of prior Fed easing cycles. In each of the bars below, we show the change in the 10-year yield from the close on the day before the first cut to where it closed seven trading days later (in the case of the current period that would equate to the period from the close on 9/17 through 9/26).
While longer-term interest rates tended to decline in the days that followed prior cuts to kick off easing cycles, the current period is one of just three when 10-year yields increased. The only other periods where yields also increased were following the cuts to kick off the 2001 and 2007 easing cycles.
To compare the change in yields in the current period to the 2001 and 2007 periods, the charts below show the 10-year yield in the six months before and after the first cut in each of the two prior cycles versus the 10-year yield over the last six months. For both periods, there are some similarities between the patterns leading up to the first cut. In each one, yields fell sharply in anticipation of the first cut (or the looming recession) and bounced when the Fed cut as investors became confident in the Fed’s ability to stave off a recession. In both cases, the bounce was short-lived, and yields quickly resumed their downward trajectory.
Given the similarities between the direction of yields, we were also curious to see if the path of the S&P 500 now had any similarities to the 2001 and 2007 periods. Starting with the period surrounding the 2001 cut, the patterns are nearly complete opposites. Whereas the S&P 500 was already plummeting after the dot-com peak in 2001, it’s at record highs now. The S&P 500’s performance in 2007 looks a bit more similar. In both cases, the S&P 500 experienced a moderate pullback in the weeks leading up to the cut and started recovering in advance of it. While the S&P 500 has already hit a new high since the Fed cut rates last week, in 2007 it took about three weeks for the index to get back to its prior highs. The new high didn’t last long, though, and within six months, the S&P 500 was near bear market territory with a decline of over 18%.
While the price charts of the S&P 500 now versus the period leading up to and after the 2007 rate cut look similar, breadth was notably weaker back then. As shown in the chart below, in 2007 (top chart), the S&P 500’s cumulative A/D line peaked in the spring, and as the S&P 500 made a new high in the summer, breadth made a lower high. Then again, October’s higher high was accompanied by a lower high in the cumulative A/D line.
For the current period, the S&P 500’s cumulative A/D line looks different than it did back then. This time, breadth has led prices to new highs, indicating a healthier underlying trend. Whether that positive breadth trend continues remains to be seen, but for now even as the S&P 500’s performance in the last several weeks has been similar to its performance around the 2007 cut, there are some notable differences.
Bespoke’s Morning Lineup – 9/27/24 – China Keeps Going
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“For those who believe, no proof is necessary. For those who disbelieve, no amount of proof is sufficient.” – Ignatius de Loyola
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The quote above sums up the state of US politics heading into the election which is now over a month away. Those supporting either candidate have already dug in their heels, and if you think you can convince someone to change to your side, it will not happen. No matter what you or the candidate says or does between now and then in hopes to sway an opinion isn’t going to work. Despite that, hundreds of millions of dollars (and collective hours) will be spent between now and November 5th. It’s hard to believe anyone hasn’t already made up their mind.
There’s not much going on in US markets this morning. Equity futures have a modestly negative bias, crude oil is slightly higher, gold is slightly lower, and Treasury yields are modestly lower. It’s been a busy morning for economic data, though, with Personal Income, Personal Spending, Wholesale Inventories, and Core PCE all being released at 8:30. Michigan Sentiment will then hit the tape at 10 AM. Regarding the 8:30 data, Personal Income and Personal Spending both came in weaker than expected, but the PCE data was pretty much right in line with expectations. In reaction to the data, equity futures have ticked slightly higher.
Outside of the US, the monster rally in China continued overnight with the Shanghai Composite rallying close to 3% capping off a weekly gain of over 12% and gains every day this week. The positive tone flowed over into Asia as well as the Nikkei was up 2.3%.
Futures may be looking at modest losses to close out the week, but that comes after the S&P 500, on a market cap and equal-weighted basis (charts below) hit an all-time high yesterday. Regarding the equal weight index, the ETF that tracks it has been in a steady uptrend for over two months and heads into this weekend right at the upper end of that channel. The market cap-weighted index was slower making a new high and isn’t in the same uptrend as the equal-weight index, but it looks like it has made a convincing breakout above the July highs.
For the S&P 500’s breakout to keep up its momentum, it doesn’t necessarily need to see leadership from the megacaps, but they have to perform in line with the rest of the market, which they haven’t done in the last couple of months. As shown in the charts below, the only one of the trillion-dollar stocks that have been making new highs is Meta (META). As shown in the charts below, the other five have a ways to go before they even start approaching their prior highs.
The Closer – Annual GDP Revisions, Claims, 7y – 9/26/24
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we kick off with a dive into the latest annual revisions to GDP (pages 1 – 3) in addition to the latest claims data. We finish by recapping the 7-year note auction (page 4).
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Investing and Politics
The countdown to Election Day continues to tick down. Politics, understandably, can rile up investors’ nerves, so be sure to check out our Investing and Politics report containing eleven simple slides summarizing the impact (or lack thereof) of DC on financial markets.
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