Wednesday, April 2, 2014

China Stimulus Hopes

We have had a huge short covering, buy the stimulus rumor run up in China, and by extension, most of the emerging markets.  The crowd did get pessimistic on China a couple of weeks ago, but it definitely wasn't panicky or fearful.  And with such an entrenched downtrend, I figured that any bounces would be shortable.  The bounce was a bit stronger than I expected, but it seems to have played itself out.  We got back to the regular scheduled programming and H-Shares in Hong Kong underperformed.

I expect China to continue its relative weakness over the coming weeks.  The debt default news are coming out on a regular basis now.  The cat is out of the bag, there is no way to put it back in until you get a panic bottom.  Sustained inflows will not come back to emerging markets for a long time.

I have not shorted emerging markets yet, because I still believe the US market should rally for a few more days.  It is too dangerous to try to catch the last little bits of this rally, but I also don't want to short too early.  So I am neutral, looking to put on a short China/emerging markets position soon, as well as a long position in Treasuries.  Probably later this week or early next week.

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