Will the “Silk Road” Boost Commodity Prices? (excerpt)

The crowd has been fleeing commodities since last year and continues to do so. My contrarian instincts are on full alert. However, I’m hard pressed to make the case for a sufficient pickup in global economic growth to advise going against the crowd.

China’s “Silk Road” project is a possible global growth booster. Yale Professor Valerie Hansen, who wrote a 2012 book titled The Silk Road: A New History, discusses the implications of this project in a 7/17 The Indian Express article titled “What the Silk Road means today.” She wrote: “The Silk Road initiative announced by Chinese President Xi Jinping in 2013 and implemented, beginning this year, contemplates so vast an investment in highways, ports and railways that it will transform the ancient Silk Road into a ribbon of gold for the surrounding countries. Officially called ‘The Silk Road Economic Belt and the 21st Century Maritime Silk Road’, the project also has the shorter title, ‘One Belt, One Road.’”

The professor concludes with a warning: “When the Chinese proclaim the One Belt, One Road as a win-win policy, more careful analysts will see this as yet another attempt to increase Chinese influence around the world. The Silk Road initiative is aptly named. Just as China used the Silk Road to expand its sphere of influence in the past, it is doing exactly the same thing now.”

The question is: How will this ambitious project get financed? The recent stock market rout must be a setback since the Chinese government was certainly counting on the equity capital markets for funding. That helps to explain why Chinese authorities have been scrambling to end the rout and restore the bull market.

Chinese officials are obviously counting on kicking their can down the Silk Road. They desperately need a new source of growth to replace their export-led model. They hope that by building more infrastructure along the road, they’ll reduce the excess capacity of all the infrastructure they built at home. While we are waiting to see how it all plays out, commodity prices continue to signal that there remain lots of gluts.

The ratio of the S&P 500 Materials sector to the S&P 500 is down to the lowest reading since November 9, 2005. It is highly correlated with the CRB raw industrials spot price index, which is also falling and is now down to its lowest level since November 12, 2009. The CRB index is inversely correlated with the trade-weighted dollar, which is up 16% since July 1, 2014.

Today's Morning Briefing: Reaching for Growth (RFG). (1) Reaching for yield vs. growth. (2) The most hated asset class is due for a bounce at least. (3) Investment strategist Yellen was right about RFY, wrong about RFG. (4) Reversal of fortune for Utilities, and bonds. (5) The growth-is-scarce scare. (6) No shortage of commodity gluts. (7) China aiming to kick some big cans down Silk Road. (8) Strengthening dollar once again depressing commodity prices. (9) Is gold just another commodity, or a pet rock? (10) Did Opie ever really kick the can down the road? (11) Focus on market-weight-rated S&P 500 Energy industries. (More for subscribers.)

China’s Trade Data Showing More Weakness Than Strength (excerpt)

The good news is that Chinese exports and imports both rose last month by 4.7% and 15.6%, respectively, on a m/m basis and using seasonally adjusted data. The bad news is that imports are still down 6.1% y/y, while exports are up only 2.8% y/y. The former suggests that China’s domestic economy remains weak. The latter, which has been in a flat and volatile range since early 2013, suggests that global economic growth remains subpar.

Today's Morning Briefing: Playing the Averages. (1) Bearish technical signals have been buying opportunities in this bull market. (2) Central planners and central bankers intervening in financial markets. (3) Chinese officials buying ETFs, just as Japanese officials have been doing for a while. (4) Draghi still buying bonds, while Yellen magically boosts stocks. (5) “Agreekment” more likely than “Grexit” until further notice. (6) S&P 500 sectors mostly showing rising 200-dmas. (7) Forward earnings still driving sector performances. (8) China’s trade data show weak domestic economy and subdued global economy. (More for subscribers.)

China’s Bubble Pops (excerpt)

The Chinese may have set a record for inflating a huge stock market bubble in the shortest period of time. It started last year on November 21, when the PBOC cut interest rates for the first time in two years. It did so to revive economic growth. Instead, investors and speculators piled into the stock market. At the beginning of February, the PBOC lowered bank reserve requirements. Effective March 2, the PBOC cut interest rates for the second time in three months. On March 5, the PBOC lowered the rates it charges commercial lenders on a special short-term lending tool.

The Shanghai-Shenzhen 300 stock price index soared 107% from November 21 through this year’s peak on June 8. It has plunged 32% since then. Even the less volatile China MSCI stock price index (in yuan) jumped 35% from November 21 through April 27. It has plunged 21% since then, retracing most of the rally. In the past, this index was highly correlated with the price of copper, which failed to confirm the recent ascent in Chinese stock prices. Instead, the nearby futures price of copper remained near its lowest reading since July 2009.

The latest moves by Chinese officials to prop up stock prices certainly won’t revive confidence in China’s stock market. Why would anyone want to invest in a market where the government can ban selling?

Yesterday, Bloomberg reported: “China’s securities regulator banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months, its latest effort to stop the nation’s $3.5 trillion stock-market rout. Investors with stakes exceeding 5 percent must maintain their positions, the China Securities Regulatory Commission said in a statement. The rule is intended to guard capital-market stability amid an ‘unreasonable plunge’ in share prices, the CSRC said.”

Regulators have introduced market-boosting measures almost every night over the past several days, as the following selected timeline shows:

6/25: PBOC injects cash into the financial markets.
6/27: PBOC cuts interest rates and lets banks lend more money.
7/1: Investors allowed to put up real assets as collateral to buy stocks.
7/2: Stock manipulation will be investigated.
7/4: IPOs suspended.
7/4: People’s Daily urged investors to stay calm.
7/4: Twenty-one brokerage firms will invest $19 billion in a stock market fund.
7/7: Trading suspended in more than 1,300 companies.
7/8: State-run companies ordered to maintain holdings in listed units.

The stock market meltdown and the inept official attempts to stop the rout could weaken confidence in the government’s ability to manage the economy, which has been slowing significantly. A slew of June data will be released in the next few days. May’s indicators were uniformly weak. For example, electricity output over the past 12 months through May was up just 3.5% y/y, the slowest pace since October 2009.

Today's Morning Briefing: The Confidence Game. (1) The first and second mandates. (2) The third mandate. (3) The credibility challenge. (4) Chinese set a record in the history of bubbles. (5) Roundtrip. (6) Banning selling is a dumb desperate measure. (7) Market-boosting measures failing to boost market. (8) Draghi running out of W-I-T. (9) Japanese exports are weak. (10) Fed needs to reload its gun. (11) “Stay Home” outperforming “Go Global.” (More for subscribers.)

Commodities: Commotions Across the Oceans (excerpt)

The latest Greek crisis in the Eurozone and the wild roller coaster ride in Chinese stock prices are boosting the US dollar and unsettling commodity markets. In addition, a possible deal with Iran over its nuclear program is depressing the price of oil, which is also boosting the US dollar, which is also weighing on other commodity prices. Consider the following:

(1) CRB industrials & gold. Interestingly, the commotions across the oceans have failed to lift the price of gold. Previously, I’ve observed that the price of gold tends to follow the underlying trend in the CRB raw industrials spot price index. The latter fell to a new cyclical low last Thursday, led by its metals component. Copper, tin, and zinc prices have been particularly weak lately.

(2) The dollar and commodity prices. The CRB raw industrials spot index is highly correlated with the inverse of the JP Morgan trade-weighted dollar. Among the weakest currencies currently are the commodity-related ones, including the Australian and Canadian dollars.

(3) The price of oil. An even higher correlation is between the price of a barrel of Brent crude oil and the inverse of the trade-weighted dollar. I still believe that the price of oil is likely to be range bound between $47 and $68. Right now, it seems to be heading from the top of that range towards the bottom. Helping to push it down is the ongoing ascent in US oil field production to 9.6mbd during the last week of June. In addition, there was a small uptick in US petroleum stocks of crude oil during the last week of June. That was the first increase in nine weeks. However, it is still 21% ahead of last year’s comparable week.

(4) The meaning of life. What does it all mean? Investors may be starting to fret that the Greek crisis and the Chinese stock market roller coaster ride could weaken global economic growth. It is a legitimate concern.

Today's Morning Briefing: Pass the Ouzo. (1) Greek in one lesson. (2) Ouzo is good pain medicine. (3) First two Greek bailouts were comparable to QE. (4) Weinberg’s Lehman-style scenario for Greece. (5) ECB could make pain in the periphery go away with more QE. (6) Scams as a way of life. (7) Is paying taxes really austerity? (8) Strengthening dollar is depressing commodity prices including oil prices, which is strengthening the dollar, again. (9) The commotions across the oceans in Eurozone and China raising risk of weaker global growth. (10) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

Braking and Accelerating in China (excerpt)

The Chinese have a very high savings rate, widely estimated to be 40%-50% of their income. A rough proxy for the amount of saving is M2, which rose to a record $21 trillion during May. It is up $2 trillion y/y and $12 trillion over the past five years.

The PBOC’s monetary policies have channeled most of those deposits into loans that expanded industrial capacity and funded property development. Now there is a glut of these, which is weighing on economic growth. Yet as I discussed yesterday, China’s banking regulators are set to scrap the country's longstanding loan-to-deposit ratio requirement, which is currently 75%. That move could inject another $1.1 trillion into the economy.

Over the past seven months, Chinese investors have poured money into the stock market seeking better returns, thus inflating a speculative bubble, which may be starting to burst already. Helping to burst the bubble are regulators intent on keeping a lid on margin lending by shadow banks. The 6/25 FT reported that official margin lending totaled $354 billion as of Wednesday’s close, up nearly 5.5-fold from a year earlier. However, this officially sanctioned margin lending, which is tightly regulated and relatively transparent, is only the tip of the iceberg for Chinese leveraged stock investing.

Unregulated margin leverage can reach 5:1 or higher, with no limits on which shares investors can buy. The funds come mainly from wealth management products (WMPs) sold by banks and trust companies. These are structured deposits that banks market to customers as a higher-yielding alternative to traditional savings deposits. Regulators moved to limit the availability of shadow margin debt on Saturday, June 13, triggering panic selling on Monday, June 15.

This past Saturday, China’s central bank cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders. In the fourth reduction since November, the one-year lending rate was reduced by 25 basis points to 4.85%. The one-year deposit rate will fall by 25 basis points to 2%, while reserve ratios for some lenders, including city commercial and rural commercial banks, will be cut by 50 basis points. The PBOC was clearly worried about a meltdown in the stock market.

Today's Morning Briefing: Central Bank Credit & Credibility. (1) Are central banks losing control? (2) Given global turmoil, US stocks may be more attractive again. (3) BOJ pumps up liquidity, but fails to ramp up production. (4) Japan’s forward earnings still rising to record highs. (5) Chinese savings glut. (6) As China’s margin debt regulators step on brakes, PBOC steps on monetary accelerator. (7) Wealth management products may be China’s weapons of mass financial destruction. (8) ECB stimulates bank lending a little bit. (9) How much does Greece owe ECB? (10) Not cool: Dudley compares Greece to Lehman. (11) Liftoff or back off? (12) Fist fight between IMF and BIS. (More for subscribers.)

China Remains Epicenter of Global Deflation (excerpt)

Monday’s WSJ included an article titled “Glut of Chinese Goods Pinches Global Economy.” The main point is that “China’s excess manufacturing capacity and slowing growth rate are … putting renewed downward pressure on prices.” I have been expounding on this theme for quite some time, so I obviously think the article is worth reading.

When China’s economy was booming, so did its demand for commodities. The result was the commodity super-cycle, which started in late 2001 after China joined the World Trade Organization on December 11 of that year. The super-cycle was briefly interrupted by the financial crisis of 2008. However, the Chinese government responded to it with a major fiscal stimulus program while the PBOC pumped lots of credit into the economy. Other governments and central banks did the same, but the Chinese led the way.

As a result, commodity prices soared again in 2009 through 2010. However, China’s factories turned expensive commodities into lots of cheap manufactured goods thanks to the availability of cheap labor. In other words, the trend in the so-called “China Price” was disinflationary, if not deflationary for the world economy. For the seven countries that report their CPIs by goods and services, durable goods prices have been falling steadily since the start of 2001: Eurozone (-1.7%), US (-12.5), UK (-13.7), Sweden (-21.6), Taiwan (-22.3), Switzerland (-23.9), and Japan (-43.7).

But China’s economic growth peaked during 2010, and labor costs started rising. The commodity super-cycle wasn’t so super, lasting just 10 years rather than 25-50 years. The subsequent drop in commodity prices since 2010 depressed commodity producers. Nevertheless, the China Price continues to fall as Chinese factories replace labor with automation. The 5/5 South China Morning Post included an article titled, “Building work starts on first all-robot manufacturing plant in China’s Dongguan.” A total of 1,000 robots will be installed at the factory, run by Shenzhen Everwin Precision Technology Co, with the aim of reducing the current workforce of 1,800 by 90% to only about 200.

To avert large-scale unemployment, the government continues to provide fiscal and monetary stimulus, which only worsens the excess capacity problem in manufacturing.

The WSJ article cited above reports, “Prices of all goods imported to the U.S. directly from China have fallen in 20 of the past 38 months, by 2.2% in all. For U.S. consumers, that is good news. But for policy makers and corporate executives, declining prices present a real challenge. The declines can sap profitability, deter investment and block wage growth, all of which are needed to help the world break out of its years of underwhelming growth.”

The article notes, as I have on a regular basis, that China’s PPI has declined on a y/y basis for 38 consecutive months. The PBOC has responded by easing credit conditions, which is likely to boost excess capacity by keeping “zombie” companies in business and by spurring even more capacity expansion.

Today's Morning Briefing: Blaming China. (1) No shortage of gluts thanks to China. (2) The epicenter of deflation. (3) Not so super super-cycle. (4) “China Price” remains deflationary as robots replace humans. (5) Deal or no deal? (6) Lots of big deals in healthcare, IT, and telecom. (7) Fed financing M&A mega-boom. (8) The fastest and easiest way to grow. (9) Challenging time for active managers. (10) Dividend-yielding stocks underperforming. (11) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

What’s Driving Yields Higher (except)

Only a few weeks ago, we all figured out why bond yields had dropped close to zero in the Eurozone. It was mostly because the ECB implemented QE on March 9, and pledged to buy bonds yielding at least the same as the central bank’s deposit rate, which was lowered to minus 0.20% on September 4.

That hasn’t changed. So why the backup in bond yields? Maybe the markets have concluded that the ECB’s QE will avert deflation and boost the Eurozone’s economic growth. The rebound in oil prices certainly helped to allay some of the deflation concerns in the bond market.

Oil prices stopped falling on January 13. The price of copper stopped falling on January 29, and is up 18% since then. Both have been highly correlated with the US bond yield over the past year. The rebound in the price of oil may be a correction of a severely oversold condition. The supply/demand balance remains bearish, but turmoil in the Middle East is recurring and tends to add a risk premium to the price of oil.

The price of copper may reflect an improving global economy in general and a strengthening Chinese economy in particular. More likely, it reflects expectations that the Chinese government will provide lots of stimulus to revive China’s growth rate, which isn’t likely to happen.

Today's Morning Briefing: Major Tom & the Fed. (1) Ground Control has lost control of the bond market. (2) Bond yields should maintain current altitude for a while. (3) Stocks ready to go into outer space? (4) A simple theory for the backup in yields. (5) Close correlation between bond yield and oil and copper prices over past year. (6) US bond market no longer for isolationists. (7) Four Fed heads speak. (8) No big surprise in Q1 earnings season’s positive surprise. (9) Financials and Health Care sectors save the quarter. (10) Energy earnings crash and burn, but S&P 500 earnings up impressive 11.5% y/y ex-Energy. (More for subscribers.)

Industrial Commodities Still Sinking (excerpt)

There’s no party in the commodity pits. While the price of a barrel of crude oil has rebounded smartly from a low of $46.59 on January 13 to $62.84 yesterday, the CRB raw industrials spot price index continues to slip and slide. In the past, the weakness in the CRB index would have been a bearish omen for stock prices. It still might be, but the monetary liquidity that isn’t boosting global economic growth and commodity prices is fueling bull markets in stocks and bonds. Consider the following:

(1) From 2005 through mid-2011, there was a reasonably good correlation between the S&P 500 and the CRB index. The two have diverged since then, with the S&P 500 heading higher to new record highs, while the commodity index has been trending lower and is now at the lowest since February 8, 2010.

(2) Since late 2001, there has been a very good correlation between the Emerging Markets MSCI stock price index (in local currencies) and the CRB index. The two have diverged significantly over the past year, with the former only 2.6% below its 2007 record high. Leading the way since early 2014 has been India in anticipation of a new reform-minded government headed by Prime Minister Narendra Modi, whose party won election last May.

Since mid-November of last year, when the PBOC started to ease monetary policy, the China MSCI stock price index has also joined the global melt-up parade. It had been very highly correlated with the price of copper since 2009. They too have diverged over the past year. This is yet another sign that ultra-easy monetary policy is boosting asset inflation rather than real growth and price inflation.

Today's Morning Briefing: Go Away or Go Global? (1) Nice melt-up overseas. (2) Days of Infamy: May Day to Halloween. (3) Two wicked corrections. (4) Three choices: Stay Home, Go Global, or Go Away. (5) Sunrise in Japan? (6) Can central banks overcome secular stagnation? (7) Not much fun in the commodity pits. (8) Unusual divergence between stock prices and commodity prices. (9) Lumber trading like lead. (10) China’s international reserves depressed by depreciations of euro and yen. (11) China’s capital outflows story still rings true. (More for subscribers.)

Churning (excerpt)

So far so good. In the 2/2 Morning Briefing, I wrote: “[T]he stock market may continue to trade in a volatile range during the first half of this year. The main negative for stocks is that valuation multiples are historically high, while earnings growth estimates are declining in the face of a strong dollar, weakening commodity prices, a flattening yield curve, and slowing global economic growth. The big positives are that bond yields are at historical lows and the plunge in oil prices is boosting consumer confidence and spending. Joe and I are still targeting 2150 for the S&P 500 by the end of this year and 2300 by the middle of next year.”

Yesterday, Kristen Scholer posted a story on the WSJ website titled “Why Record Highs May be Harder to Come By This Year.” She observed: “The Dow Jones Industrial Average and S&P 500 set 188 fresh all-time highs, or the equivalent of roughly one every five trading sessions, during 2013 and 2014. This year, though, the major indexes have booked only nine historic highs as stocks have moved sideways for much of 2015. … It has been 34 sessions since the S&P 500 last finished at a historic high. That’s the index’s longest streak without an all-time high since the first record of the current bull market in 2013, according to Bespoke Investment Group.”

Why has this been happening? According to the article: “Corporate buybacks, deals and low interest rates have kept equities afloat, while stalled earnings growth, high valuations and slowing economic activity have put a lid on gains.” If that sounds like the same story I’ve been telling, then I should disclose that I was interviewed for the WSJ story and mentioned as follows: “He thinks the tug of war between the bulls and the bears will continue through the summer and into the fall. ‘While some institutional investors might be inclined to sell due to overvaluation, the most significant buyers continue to be corporate managers buying back their shares, and they aren’t nearly as sensitive to valuations,’ he said.”

At the beginning of 2013, in the 1/29 Morning Briefing, which was titled “Nothing to Fear but Nothing to Fear.” I noted: “In recent discussions, some of my professional friends told me they are now worrying that there is nothing to worry about. They note that there may be too many bulls for the good of the bull market.” I also noticed that many of them had “anxiety fatigue.” After the widely feared Fiscal Cliff was averted, investors seemed to be less prone to anxiety attacks. In other words, they were less prone to sell on bearish news, and more likely to hold their stocks and add to their positions on any weakness.

Now they seem to have “bull market fatigue” because valuations are stretched. Nevertheless, they are mostly staying fully invested. Consider the following:

(1) Anxiety fatigue. Since the start of the year, the S&P 500 has been trading between a record high of 2117 on March 2 and a low of 1992 on January 15. There have been lots of panic attacks since 2013, but none that turned into significant corrections. Recent worries that the plunge in the oil price might trigger a rout in the junk bond market haven’t panned out. China’s latest batch of weak economic indicators has been mitigated by the PBOC’s easier monetary policy. The winter/spring economic slowdown in the US increases the odds of a “one-and-done” or “none-and-done” rate hike by the Fed this year.

(2) Moving averages. The S&P 500 has remained above its still-rising 200-day moving average after briefly retesting it in early October last year. The S&P 500 Transportation index is currently back to its 200-dma. That’s a bit of a concern from a Dow Theory perspective, especially since the index’s 50-day moving average has turned down since it peaked on January 22.

(3) Melt-up worries. Interestingly, in recent conversations with our accounts, I am finding that more of them are worrying about missing a melt-up in stock prices than about dodging a correction or a meltdown. What might trigger a melt-up? The obvious answer is a significant postponement of monetary normalization by the Fed. A more likely scenario is that the initial lift-off in interest rates might cause corporations to stampede into the bond market to raise funds for more buy backs and M&A.

Today's Morning Briefing: Paths of Least Resistance. (1) Going nowhere fast. (2) Tug of war. (3) From “anxiety fatigue” to “bull market fatigue.” (4) Still too many bulls. (5) Home on the range. (6) Sector-neutral strategy beating many active managers. (7) Melt-up anxiety. (8) Hard to find anything bullish in crude oil’s demand/supply balance. (9) Maybe it’s geopolitical. (10) Saudis playing for keeps. (11) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

Less Bang-Per-Yuan (excerpt)

Over the past couple of decades, China’s growth was supercharged by lots of debt that was used to expand industrial capacity to employ the huge influx of new workers into the labor market resulting from the demographic dividend. The Chinese have a very high saving rate. As some of them prospered, they poured their savings into properties; many built in the country’s “ghost cities.” Now China has a glut of industrial capacity spewing out life-shortening pollution and a speculative bubble in real estate that is quickly losing air. The government continues to provide lots of easy credit, but it has lost its bang-per-yuan for stimulating growth, and instead is fueling a speculative bubble in stocks.

Real GDP rose 7.0% y/y through Q1-2015, the weakest growth rate since Q1-2009. Haver Analytics calculates that the seasonally adjusted and annualized quarterly growth rate was 5.3%, also the weakest since Q1-2009. Industrial production was up only 5.6% y/y in March. It’s very unusual to see production growing below real GDP.

Over the past three months through March, bank loans are up at an annual rate of 16.9 trillion yuan ($2.7 trillion dollars), the highest since March 2009! Yet despite all that liquidity, real GDP growth continued to move lower.

Today's Morning Briefing: Live Long & Prosper. (1) Spock and China’s future. (2) “China will get old before it gets rich.” (3) The downside of China’s demographic dividend. (4) Chinese speculating in stocks rather than real estate. (5) Q1 real GDP up just 5.3% (saar). (6) Big declines in exports, imports, and railways freight traffic. (7) Plenty of credit, and lots of deflation. (8) More easing coming. (9) Premier is alarmed. (10) US consumer getting squeezed. (11) Focus on market-weight-rated S&P 500 IT. (More for subscribers.)

Chinese Government Driving Stock Prices Higher (excerpt)

On 4/8, Reuters reported, “Chinese funds are snapping up shares in Hong Kong, betting that a link-up between the Shenzhen and Hong Kong stock exchanges, and easier access for institutional investors, will yield quick double-digit or even triple-digit arbitrage profits. On Wednesday, Chinese investors used the entire 10.5 billion yuan ($1.69 billion) daily investment quota for buying Hong Kong stocks under the Shanghai-Hong Kong Stock Connect scheme for the first time. This propelled the Hang Seng China Enterprises Index up 5.8 percent, following a 6.43 percent gain last week, and helped the Hong Kong exchange reach record volume on Wednesday.”

China's CSI 300 stock index of the largest listed companies in Shanghai and Shenzhen has soared 91.3% y/y while the Hong Kong China Enterprises Index of 40 companies is up 36.8% over the same period. The broader Shanghai A-Shares index of around 1,000 companies is up 67.0% since mid-November 2014, when the PBOC started cutting interest rates to boost economic growth. The China MSCI includes 138 companies and recently joined the circus with a gain of 10.1% just last week.

Nevertheless, the China MSCI forward P/E remains relatively cheap. It was just 10.3 at the start of April. On the other hand, this composite’s Net Earnings Revisions Index was -3.9 during March, the 14th consecutive monthly negative reading. Furthermore, both forward revenues and forward earnings remain below last year’s record highs.

The Reuters story cited above also noted, “In the past, arbitrage opportunities proved a mirage. The Shanghai-Hong Kong stock connect not only failed to narrow the premium after its November launch but actually widened it as Chinese retail investors declined to move money south. But this time may be different. In late March, China's securities regulator improved access, letting mainland mutual funds invest in Hong Kong shares via the connector. Several days later, China allowed insurers to buy shares listed on GEM.”

The 4/10 FT reported: “After years of poor performance, confidence in the stock market has returned in China with a vengeance. Savers have switched hundreds of billions of dollars out of property, deposits and wealth management products in the hope of making a fast buck in stocks. … Investors opened more than 4.8m new stock trading accounts in March alone and almost 1m more in the first two days of April, according to the latest figures from the country’s main clearing house. These accounts largely represent new investors ….The explosive growth of margin lending, in which brokerages lend money to investors to play the markets, also suggests irrational exuberance. Margin loans outstanding in Shanghai and Shenzhen--home to China’s two stock exchanges--totaled Rmb2.2tn ($358bn) on Wednesday, two-and-a-half times the total six months earlier.”

Today's Morning Briefing: The Greatest Show on Earth. (1) A day at the circus. (2) Honorary member of Crudele’s rig club. (3) Send in the clowns. (4) Cecil B. DeMille on central banks. (5) Dudley’s Put. (6) What’s the difference between the “wealth effect” and asset bubbles? (7) Removing the safety net in China’s high-flying stock market. (8) Draghi sends EMU stocks into orbit. (9) Lots of cotton candy in the capital markets. (10) The Down Under controversy. (11) Are analysts underestimating EMU earnings? (12) “Woman in Gold” (+ +). (More for subscribers.)

Solid Rebound in PMIs Augur Well for Global Economy (excerpt)

Stock investors have been going global rather than investing in the US. While going global has been mostly driven by relative valuation considerations rather than relative earnings, global fundamental economic indicators are generally improving. The reasons could be that lower oil prices are boosting global growth and that the stronger dollar is redistributing growth away from the US to other countries.

Especially impressive is the rebound in the JP Morgan Global Composite Output PMI from a recent low of 52.4 during December to 54.8 last month. The increase has been led by the service component, while the manufacturing component has meandered between 51 and 52. The Eurozone has been leading the improvement in the global composite, rising from a recent low of 51.1 during November to 54.0 during March.

The March PMIs suggest that manufacturing may be weakening in the US, while services are holding up. Japan’s M-PMI (50.3) and NM-PMI (48.4) were relatively weak last month. China’s M-PMI continues to hover around 50.0, while its NM-PMI has remained solidly above that level at 53.7. Both indexes are strong in the UK.

Today's Morning Briefing: Earnings Revival? (1) Another earnings season. (2) Oil, the dollar, and exports all weighing on earnings. (3) Analysts now expect S&P 500 earnings growth of only 2.6% this year. (4) Negative growth during H1-2015. (5) Recent forward earnings rebound waiting for confirmation from commodity pits. (6) US exports are the pits. (7) Going with “Go Global” for now. (8) Cheap is in fashion. (9) Puzzling: Weak currencies boosting forward earnings in Japan, but not Eurozone. (10) Global PMI rebounded smartly in March, led by Eurozone. (11) Focus on market-weight-rated S&P 500 Transportation. (More for subscribers.)

PBOC Fueling Chinese Stock Rally (excerpt)

The PBOC is committed to doing whatever it takes to boost China’s flagging economy. The central bank started lowering interest rates late last year and bank reserve requirements early this year. As a result, the China Shanghai ‘A’ stock price index (in yuan) has soared 53.1% since November 19.

Markit reported bad news on China’s M-PMI, which fell back into contractionary territory in March. It sank from 50.7 in February to 49.6 last month, which was slightly above an earlier flash estimate of 49.2. On the other hand, the official M-PMI rose to 50.1 in March from February's 49.9.

On Monday, the PBOC, the housing ministry, and the banking regulator said in a joint statement that buyers of second homes would be required to make a minimum down payment of 40%, down from the previous 60%, as part of efforts to stimulate the housing market.

China new home prices registered their sixth straight month of annual decline in February, as tepid demand continued to weigh on sentiment despite the government's efforts to spur buying. New home prices fell 5.7% y/y in February, according to Reuters calculations based on data from the National Bureau of Statistics. The reading was worse than January's 5.1% decline and marks the largest drop since the current data series began in 2011.

On Sunday, Zhou Xiaochuan, China’s central bank governor, said that he is concerned about signs of deflation and that policymakers are closely monitoring the slowing of global economic growth and declines in commodity prices. He added that the central bank is “vigilantly” ready to battle deflation. The Shanghai ‘A’ stock price index jumped 2.6% on Monday.

In the past, there was a good correlation between the China MSCI (in yuan) and the CRB raw industrials spot price index. They’ve diverged since early last year, suggesting that while slowing growth in China is bearish for commodities, it is bullish for stocks because the PBOC will be forced to ease. Bad news is good news.

Today's Morning Briefing: Bad News Bulls. (1) Breaking bad. (2) Central bank liquidity is the drug of choice. (3) Updating the “insanity trade.” (4) Global stocks move higher as commodity prices move lower. (5) Japan’s CPI and industrial production disappoint. (6) Draghi steps on the accelerator of an accelerating Eurozone economy. (7) Bad news out of China. (8) PBOC eases mortgage terms and remains vigilant about deflation. (9) US stocks marking time while waiting for Fed to do something, nothing, or not much. (10) S&P 500 forward earnings rising again. (More for subscribers.)