Xi Jinping Looks Safe for Now But The Fed’s Rate Hikes Could Destroy China’s Calm And His Latest Coronation: The Geopolitical — Stock Market Connection

The Fed’s singleminded desire to crush inflation is hammering global stock and bond markets and making highly indebted nations twitch and stammer as their stability suddenly comes under threat. While China might look stable due to its surveillance state and massive trade surpluses the reality is it too has a massive debt problem which its leaders have long assailed. Every earnest attempt to deleverage, however, has come to naught on account of one global issue or another, and now the Fed’s rate hikes are causing their stock and currency markets to fall hand in glove with every other nation. The outlook worsens by the minute as the volatility risk premium points to a US market fall over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. There are several negative factors across global asset classes. Gold is trading as a risk-off asset. Copper and Oil charts are pointing to declining global GDP expectations. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to fall over the next few days as we retest the June lows, and the Shanghai Composite to follow suit unless China can direct is National Team of stock brokers to intervene.

The violent events stretching from Myanmar to Pakistan to Iran to Russia and Ukraine might seem to have evaded China but simmering discontent could lead to unrest there too. This is because China’s terrible policies of late are all in service to the upcoming quinquennial Party Congress, which serves no one in China but the Communist Party membership. And as the markets plumb new lows China may be in economic havoc and state repression as Xi Jinping stage manages his coronation as dictator for another five years. S&P notes “Many of China's state-owned companies are mired in heavy debt and may need external help as the economic slowdown limits their ability to grow earnings, according to a report by S&P Global Ratings…The ongoing troubles at property developers and efforts by them to raise funds have hogged media space, but Ratings sees increasing warning signs emerging for a wider range of industries including construction, engineering, consumer discretionary and consumer staples.”

Should investors start discounting restructurings at SOEs the Chinese Yuan would fall even further and that would stimulate capital flight as affluent Chinese try getting their money out of the COVID zone that is their country. Xi Jinping’s constant closures of Chinese cities are to blame for declining economic activity and the consequently parlous state of SOE finances, and with no end in sight to these lockdowns the potential for a destabilizing currency collapse are growing. Equity investors have this front and center on their minds as they sell off cherished holdings in preparation for a global recession.

This raises the grave question of whether the Party Congress would knock out Xi if a financial crisis occured simultaneously. A power struggle in China would destroy global confidence and lead to unpredictable changes across Eurasia, particularly China’s client states like Russia and Pakistan. Presently this concern feels more like a hypothetical black swan as Xi arrests one political competitor at a time, but with the anti-corruption showing little sign of abating (particularly given the CHIPS Act and China’s inability to own the semiconductor space) the coronation can’t happen too soon to suit Xi.

The National Interest notes “Xi’s vertical consolidation of political power across all levels of the party and the state has drummed up discontent among the elite class, especially in the run-up to the 20th Party Congress. Senior party cadres have been strategically leaking their disapproval of Xi’s leadership in recent months and many are worried about Xi diminishing the already flailing concept of collective leadership... In spite of these challenges, however, there is no realistic elite power struggle nor any semblance of an organized political group within China that can seriously counter Xi’s consolidated rule.”

While global investors may abhor Xi and his policies there is no appetite at this moment for more uncertainty. Consequently investors are monitoring China for signs of political stability, no matter the declension in human welfare that Xi and his Communist colleagues exact on the world.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and SPXU, all of which still nets out to a meaningful short position in equities