(The post was meant to be published yesterday night, so apologies if some comments might sounds outdated already)
Here at the Jack Burton School of TradingTM we are wondering if the market is missing a piece of information or if is, at least, underestimating a risk.
Looking at the Treasuries yield going lower? Or maybe the Bund?
What if the recent price action (today in particular) is not driven by US "political" battles, but by China?
“I have a very positive attitude about this”: common feeling among many market participants.
Most of the Street is looking at China as not much of a problem, at least until fall. What we fear is that China is slowing down (as some data is showing) and the slowdown is already enough to create problems for the rest of the world, especially where the effect of the wall of liquidity/credit impulse/investments coming out of China has been stronger.
Let`s try to put pieces together (apart from the obvious ones such as Chinese stocks), to name a few: Commodities, Canadian real estate, Australian real estate. We see them as some sort of canary in a coal mine (We can`t really count on Japanese stocks as BOJ has been buying them like crazy).
To confirm that China is indeed the problem we would monitor price action in European assets. If they start (or keep) under-performing US assets, we think what looks like a potential fade now, will have the capability to transform itself into something bigger.
Source: Cornerstone Macro
Given how European risky assets have performed since the beginning of the year and how consensus that view is now, we think European equities could be in for a bad surprise and another consensus trade, Italian BTPs, could become a bitter pill to swallow for those who recently closed their shorts after the French elections (if we are looking in the right direction=East). Europe's growth is heavily dependent on China (exports to China & HK % GDP (20163Q): Germany 2.5%, Europe 1.3%, not to mention investments) and if something is truly happening there we will feel it in this part of the Old World.
BTP could still go up at the beginning as Rates are bid and the market might discount a more dovish ECB, but we don't believe it could go up much more from here. In our humble opinion the ECB would step in only after a proper risk off move, which at a certain point (as in February 2016) would drive BTP lower. Moreover, the market is not pricing anymore the risk of early elections in Italy (look this space..and don`t forget the banking system!).
So, in the end, if we just focus on the US “noise” this move could potentially transform itself into a juicy dip for risky assets. But what if the market is looking in the wrong direction? This will probably all transform into another dip meant to be bought, but in case is not remember:
“It`s all in the reflexes”.