The Latest On The Global Economy: China’s Economy Is Key To The World And Yesterday’s New Has Rallied The Bulls

While the US economy slows and Europe’s economy dives, the fate of the Chinese economy is uncertain. This has been feeding the bears since markets hate uncertainty, but yesterday’s announcement out of China triggered a short squeeze that has the bulls ebullient. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. The action in major currencies indicates the $US is weak. But there was also one negative factor across global asset classes. The US yield curve is bear steepening. Expect the S&P 500 to be range-bound over the next few days until a further downturn to the 4000 region.

Key to the global economy is not so much Europe, but China. This is because there is little doubt Europe is headed into recession and will go into a longer recession if the European people decide to sacrifice for the fighters of Ukraine and fully sanction Russia. But China is more uncertain and more important because if Chinese growth falls further, it hurts Europe even more since they export to China. This dynamic becomes a cascading negative impacting the global economy. So yesterday’s Chinese announcement was a key event moving markets.

Chinese data haven’t provided any certainty since there seems to be contradictions. While industrial output and retail sales were stronger than expected, the survey of unemployment was much worse than expected. I trust surveys more than government data points, and perhaps for this reason the Chinese Vice Premier emphasized equity market stability and end to the regulatory push impacting tech companies. This talk is good but it’s unlikely to stem sentiment that global businesses are going to pull back because of market volatility, and the effects of the Ukraine war on commodity prices. Expect the bulls to lose steam soon and the S&P to take another leg lower in what is bound to be an eventual bear market.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.