Daily Brief Macro: On A Slow Boat To China and more

• The National People’s Congress this month did not significantly improve China’s current economic situation.
• The Congress confirmed Xi Jinping’s intent to prioritize his power over long-term economic strategies.
• Xi Jinping’s actions suggest a focus more on personal power than on the economic health of the nation.

• Welcome to the Emerging Market Series, this week covering the rotating capital flows away from Japan and its significance for China and Emerging AsiaWatch a condensed version of the key findings from this article on video.
• Recovering from the ‘lost decades’ Japanese equities have been out of favor and continuously underperforming global benchmarks.
• For 2023 however, the Nikkei 225 actually outperformed the S&P 500, returning 28% vs. 24% respectively, and the euphoria around Japan returning to normalcy in terms of structural inflation, growth and its feasibility as an investment has continued into 2024 (Nikkei vs. SPX ≈ 15% vs. 8.5%). 

• The cancellation of the Chinese premier’s annual press conference is a tell-tale sign that economic policymaking is increasingly centralized around President Xi’s pet priorities.
• This comes as the cyclical position remains vulnerable; the boosts from Lunar New Year activity will make February’s data look good but this is far from a well-grounded recovery.
• The government’s work report prioritizes what it calls “quality growth”, but the policy confusion and damaged economic sentiment will inhibit a well-grounded recovery. 

• Take aways: Low vol in commodities leading to no directional bets. Chinese smelters cut striking fear in the market. Chinese copper stock levels about to be drawn. The broad commodity complex looks increasingly bullish accordingly. The technical picture suddenly looks very bullish in the commodity landscape as Oil, Copper and Silver have broken higher over the past 24 hours with the broad BCOM index also breaking out of the bearish channel.
• Is the sudden bullish price action a sign that the procyclical Chinese activity is back?
• Chart 1: Oil is breaking HIGHERAs macro volatility has been grinding lower and lower and equites have gone higher and higher, being short volatility in commodities has been the only game in town.

• Penny stocks trading surge reminiscent of meme stock mania in 2021
• Increase in trading volume and number of penny stock companies listed on public exchanges
• Retail investors driving boom in trading penny stocks, companies may have potential but are not profitable yet

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• US economic data while surprising on the upside fails to buoy the USD vs the JPY
• BOJ awaiting shunto talks for more evidence of a sustained move out of deflation
• What are the implications for global markets if mass repatriation of Japanese capital

• Gold has realized an equity-like return over the last 20 years.
• Gold has shown zero sensitivity to equity market declines, making it an excellent portfolio diversifier.
• With the long-term outlook for bonds clouded (structurally lower yields and higher volatility), gold will likely become investors’ preferred equity hedge.

• Debt / In Depth: Why China’s efforts to resolve hidden government debt could fall short
• PM 2.5 /: China’s air pollution rose last year amid post-pandemic economic recovery
• Corruption /: Former policy bank executive caught in anti-corruption dragnet

• China’s private fund sector was put through the ringer in 2023, with a shaky economic recovery and relentless stock market volatility testing portfolio managers’ resolve.
• During the third straight year of rout in the Chinese stock market, private bond funds’ returns outperformed their stock-focused peers.
• Another bright spot was quantitative investment funds.