In the last four trading days the “Double Whammy”, China worries and the QE taper, have revitalized the media and market volatility. Bad news is good news for the folks at Barron’s and CNBC. The market has tanked (S & P now down almost 6% from the May all-time high), the result of the aftershock of Wednesday’s not-surprising Fed revelations (QE might start winding down in fall 2013) and a sharp spike in the Shanghai Interbank Offered Rate (SHIBOR).
Things really got roaring in mediaville with the publication of this week’s edition of Barron’s and its front page story, “China’s Looming Credit Crisis, Where Will It End?” There had been a spike of significance in the SHIBOR rate, which had been trading between a 2.5% and 4.5% rate most of the year. The spike took it very quickly to 12%+, signifying major credit and liquidity issues in the Chinese banking system. Nobody, including yours truly, saw this one coming at the end of last week, because we were enthralled with the sharp decline in fixed income securities of all color (and subsequent sharp rise in rates) precipitated by the Fed OMC press conference and its assertion that QE might see its taper begin before the end of the year. As a result Asian markets, which were getting their heads handed to them due to the “Dreaded Taper”, really got whacked on Chinese solvency concerns.
I mean there were people running around with (and the media reporting) stories that we might be seeing a “Lehman Brothers” moment in China. Layer on top if this the generic U.S. Treasury 10-year note trading down in price and up in yield to 2.66% (the highest in 20 months) and you have a real panic going in the U.S. and Europe as well. Fortunately for all the 10-yr. rallied to close in the U.S. at a 2.5364% yield and the Chinese overnight repo rate has fallen from yesterday’s close of 6.65% to 5.76 % (as of 10:20 PM 6/24/2013). There has been no official Chinese Government statement to indicate that they are providing liquidity. By the way the copy of the article we’ve attached from Barron’s begins with a couple of interesting stats that the U.S. economy would love to boast… Though GDP growth is slowing (as a result of concerted government policy), it was still running at 7.7% in the 1st quarter, and Chinese sovereign debt to GDP was only 30% vs. 100+ % for the U.S. They have room to manuever.
This weekend we got the “Double Whammy.” It is important to note again that the correction we have had, so far, has amounted to less than 6% in for the S & P 500. The move we have had so far in bonds may be a blessing-in-disguise, as it gets a good chunk of the pain out of the way early. It also gives stark proof to the notion that bond investing does carry risk, especially after a 30-year bull market in bonds. Finally, it may be the impetus for the correction many wanted to see before they put money to work.
What do you think?
PS. Since penning our earlier remarks re. China and the SHIBOR rate, the Chinese markets have turned significantly lower and SHIBOR is slightly back over 6%. I guess the players in that market believe that China will let some of its banks go under, or allow their economy will be getting significantly weaker. The implication of “China Looming….” for bonds may be that a flight-to-safety bid may show up.
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