21.09.2021
China
Yesterday saw some significant moves in several key macro factors. The charts below detail the sharp escalation in China stress (at the national, rather than real estate sector specific level) & the impact that had on broader risk appetite & the credit market.
The Evergrande story has been in motion for months. Up until yesterday, contagion had been restricted to immediate peers – Chinese real estate / financial names, a few Australian miners.
What changed yesterday was the move in sovereign China CDS. In z-score terms, this was a 3 standard deviation move. Sovereign CDS liquidity is poor but the signal function is unmistakeable – markets moved this from an idiosyncratic story to one with potentially far broader ramifications.
What changed yesterday was the move in sovereign China CDS. In z-score terms, this was a 3 standard deviation move. Sovereign CDS liquidity is poor but the signal function is unmistakeable – markets moved this from an idiosyncratic story to one with potentially far broader ramifications.
For the first time in a while the risk off move had a material impact on the credit markets – European financials & high yield especially. Again it was around a 3 standard deviation move.
The spike in VIX was a 2 standard deviation move on Qi. VXEEM, VDAX & the gold/silver ratio experienced similar moves.
What next?
China is the epicentre of current market moves & your view on how the Evergrande story unfolds is critical. China bears will see these factor moves as a genuine re-pricing. If so, Qi can high-light those markets that are lagging versus the new environment.
For example on current patterns that combination of China stress & broader risk-off spilling into credit has pushed Qi model value for 10y US Treasury yields below 1.00%. There’s more of a flight-to-quality move to come for USTs.
Alternatively, those who see Evergrande as localised, & simply a catalyst for a complacent market overdue a correction, use Optimise Trade Selection to screen for single stocks, sectors, ETFs sensitive to Chinese sovereign CDS spreads & with a negative Qi Fair Value Gap.
In times of stress it is more important than ever to quantify relationships between asset price & the macro environment.
China is the epicentre of current market moves & your view on how the Evergrande story unfolds is critical. China bears will see these factor moves as a genuine re-pricing. If so, Qi can high-light those markets that are lagging versus the new environment.
For example on current patterns that combination of China stress & broader risk-off spilling into credit has pushed Qi model value for 10y US Treasury yields below 1.00%. There’s more of a flight-to-quality move to come for USTs.
Alternatively, those who see Evergrande as localised, & simply a catalyst for a complacent market overdue a correction, use Optimise Trade Selection to screen for single stocks, sectors, ETFs sensitive to Chinese sovereign CDS spreads & with a negative Qi Fair Value Gap.
In times of stress it is more important than ever to quantify relationships between asset price & the macro environment.
