Authored by Peter Tchir via Academy Securities,

The “big” news on the week, at least the news that seemed to move markets the most, was China’s stimulus plans. It started with some monetary policy, which didn’t do much, but China followed up with fiscal stimulus, and the perception that there is more to come permeated the market thinking. We highlighted in Thursday’s The “Other” Chinese Bazooka that this time, the benefits would accrue much more to China and its companies, than to the U.S. and its companies.

Before delving into our take on how things will play out, let’s highlight just a couple of things from Academy’s Geopolitical Intelligence Group:

But I really don’t think so.

After an overnight session that initially had U.S. indices rising with Chinese stocks (the Shanghai 300 did even better than the Hang Seng - 16% versus 13%), the performance sagged. Yes, U.S. shares eked out gains of less than 1%. That was nothing like we saw in Asia or even Europe (where the Stoxx 50 rose 4% on the week).

Also, following up on last weekend’s Starting a New Cycle? report, it was noticeable how much of the strength in the U.S. appears to occur overnight, or at the open.

Given that we should have seen some performance chasing on Friday, that seems concerning. September, which started out weak, just like August, managed to fight the “seasonals,” and the major U.S. indices are up around 2% with one trading day remaining. However, there is this lingering concern, for me, that the post-FOMC surge was “strange” and isn’t getting any material follow through.

It seems highly unlikely to occur 3 times in a row, but let’s not forget First Friday’s which have not been kind to markets. While it seems unlikely to occur again, there is nothing about recent trading that makes me believe that we aren’t susceptible to another bout of weakness at the start of October.

And I said so.

We had some great meetings last week in Minneapolis and Chicago. Somehow, with anything geopolitical, it seems that many people want to know “what scares you the most?”

In a world where:

I answered that my biggest fear, right now, is that the U.S. will grab at a “carrot” offered by China, reducing the pressure on China’s economy and giving them the opportunity to buy a couple of more years to “properly” prepare for the competition with us.

While Sinead O’Connor sang “Through their own words, they will be exposed,” I think General Spider Marks puts it more eloquently – China has a history of “marching in plain sight.” Basically China tells us what they want to do (in this case, to become the economic powerhouse of the world) and we ignore that at our own risk.

Nothing about the new stimulus plan does anything to derail my view that The Threat of Made By China is one of the biggest threats facing American (and European) companies. The threat to sales in China has already occurred. The threat to sales in Emerging Markets is occurring and we are seeing increasing amounts of competition from Chinese brands in Europe and even the U.S.

I keep trying to come up with a “positive” spin for the global economy on China’s stimulus efforts. But here is what I keep coming up with: 

All of this is occurring while the U.S. is:

At some level, even I’m forced to acknowledge that much of this “doesn’t sound like tomorrow’s problem,” but I fear it is and the markets will continue to price it in, like I think we saw most of Thursday and Friday.

Lots of information coming out, and I’m continuing to lean towards the potential that the jobs data comes in “better” than expected. One thing that would really rattle markets (I think) would be an upward revision in Non-Farm Payrolls. Even writing that seems weird, but since consensus is now so fully on board the “jobs data has been inflated” boat, it is getting very crowded. If I’m correct on the problems with seasonals (too many additions to start the year, too many subtractions in the summer) and if the BLS has “corrected” some of their modelling assumptions around the birth/death model, it wouldn’t surprise me to see a beat on the headline number AND upward revisions. Not sure I want to bet on that, but…

Finally, the discussion is clearly headed towards the “Neutral Rate.” The good thing about that is we all know it is a number somewhere between 0% and 5%.

Seriously, I think we will find that the market is pricing in a terminal rate of sub 3% by the end of the July 2025 meeting and this number is “too low, too quick” (thinking more like 3.5% being the terminal rate and not getting there until the end of the year, unless we go from “bumpy” to “clunky” landing).

If you want to play the China stimulus (and I do), do it direct via Chinese stocks (I use FXI and KWEB) and don’t assume U.S. “proxies” will do well.

I think oil is the biggest beneficiary of geopolitical risk, but I’m leaning towards “escalation to deescalate” in the Middle East and even, though more hesitantly, between Russia and Ukraine.

On the rates side of the equation, I think 10s and 30s are susceptible to moves higher on steepening, deficit concerns, debt ceiling negotiations, and auctions – call it 4% on 10s.

I continue to like credit as I think that investors should be heavily overweight credit, especially at the front end (2-years and in) and think that the competition from private credit funds and even some big banks to get money out to customers will help support credit spreads from the bottom (lower rated entities) on up.

Now that I’ve actually listened to (I cannot get the song out of my head) and read the lyrics to “Emperor’s New Clothes,” I cannot tell if the song is uplifting, or really depressing. And while I think China might be exposed as “being naked,” I think they are in the process of buying themselves (and their companies) time and that we will aid and abet them in their efforts to spur their economy forward, and we are not seeing the danger to ourselves.

Maybe too heavy, maybe too melodramatic, but it is the path that keeps jumping out at me.

In any case, let’s hope the first week of October starts better than the first weeks of August and September, but I’m starting to believe that we may see a three-peat!