China is turning the cycle

The local market started with a drop and then spent the whole day recovering, ending the session in negative figures. Unlike yesterday, the initial fall was further and recovered less. The weekly turnover in the last three weeks has been a step up compared to the previous four to five months, as the market has started to lose momentum as turnover picks up. 

Size continues to matter as micro-caps were the best while large caps were the worst. Tech and energy were the best sectors while miners and healthcare were the worst. Major big caps, such as CSL Limited (ASX: CSL), BHP Group (ASX: BHP) and Woolworths (ASX: WOW) going ex-dividend weighed on the index and sentiment.

The main data point that got attention overnight was the ADP employment update in the US, which was a big miss similar to last month. Markets are using Nonfarm Payrolls (NFP) as the US Fed indicator of job market strength. NFP was a solid beat last month despite weak ADP. We are expecting the next update for NFP on Friday night. We will get the weekly jobless update in the US tonight as well. 

Looking through the ADP data…

Private businesses in the US hired 374,000 workers in August of 2021, compared with a downwardly revised 326,000 increase in July and well below market expectations of a 613,000 rise. The service-providing sector added 329,000 jobs led by leisure & hospitality (201,000); education & health (59,000); professional & business (19,000); and trade, transportation & utilities (18,000). The goods-producing sector added 45,000 jobs, boosted by rises in construction (30,000), natural resources & mining (9,000) and manufacturing (6,000). "We have seen a decline in new hires, following significant job growth from the first half of the year. Despite the slowdown, job gains are approaching 4 million this year, yet still 7 million jobs short of pre-COVID-19 levels. Service providers continue to lead growth, although the Delta variant creates uncertainty for this sector", said Nela Richardson, ADP chief economist.

China continues to lead the divergence from the Western economy’s addiction to endless stimulus and lack of reform. We don’t have to like it or accept it but as an investor, you need to understand the risk profile of the global markets when the second biggest economy is taking a different path. It adds no value to take geopolitical positions. It is understanding the cycles and the risks.

Excerpt from Reuters on China's reform topic…

China's regulatory crackdown is being waged to build a prosperous market economy and criticism from the United States and the West that it is taking "a backward step" are smears, state-backed tabloid Global Times said on Tuesday. "For the moment, reforms in the West are stuck in silence while public opinion there is busy pointing fingers at China, while China is the true doer who is slow in speech yet quick in action," the editorial reads. The Global Times is published by the People's Daily, the official newspaper of the Chinese Communist Party. The piece described the regulatory wave as a means to fight against monopolies, safeguard national security, and protect the interests of workers. "Such economic governance is not new to the world, but Western media outlets have kept pinning political labels on China's relevant practices, cursing China to fail," the op-ed read. "China has been at the forefront of developing countries, and we are determined to take a modernization path that is different from that of capitalism," the unnamed writer added. China has imposed a flurry of regulations and penalties over the past year, affecting sectors ranging from gaming to education to e-commerce and rattling domestic and foreign investors.

Excerpt from Reuters on China travel outlook…

China's aviation regulator is likely to keep the current tight caps on international flights throughout the first half of 2022, analysts cited Air China as saying this week. The move has broad implications for tourism in the Asia-Pacific region, where Chinese outbound travellers normally play an outsized role, though other countries have also been slow to open borders because of relatively low vaccination rates and rising COVID-19 cases. The Civil Aviation Administration of China (CAAC) last month said that weekly international flights were at only 2% of 2019 levels, as more flights were suspended amid a rising number of imported COVID-19 cases. China's three biggest airlines, Air China, China Southern Airlines and China Eastern Airlines, said in their earnings calls that CAAC's restrictions on international flights may continue until the first half of 2022, given the government's COVID-19 prevention approach around the Beijing Winter Olympics in February, Parash Jain, head of shipping, ports and Asian transport research at HSBC, said in a note on Wednesday. This would push a full recovery further out to 2024, Jain added.

It is clear that the path China and Western Economies are taking are quite separate while globalization means China slowdown will have an impact on the global economy. Supply side disrupted boost to inflation may become a lot more persistent as China slows further. Business models that are waiting for daigou channel recovery or China stimulus boost or Chinese tourism may be waiting longer than expected. China is willing to deflate asset bubbles to drive reform. Ignoring cycles may hurt future investment returns! 

Comments on the US market last close…

US market finished mainly flat after starting positive on the first day on Sep. ADP employment update was a big miss but improved on the previous big miss. PMI data has been mainly weaker globally while US was holding up better. DOW -0.14%, S&P +0.03%, NASDAQ +0.33% and RUSSELL +0.58%. VIX slide back to low 16. Yields ticked lower with USD. Oil ticked lower as OPEC+ agreed to gradual increase. Gold was flat and Copper fell. Iron Ore is falling again...back below $150. WHO is finding more variants with higher risk but Delta is dominant for now. Aussie trade data, EU PPI and US weekly job market update ahead. Nonfarm payrolls on Friday will be key. Property and Utilities were the best while Energy and Banks were the worst. We still think they will keep delaying tapering while stagflation takes over.

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