The stock market is over China.
On Monday morning, US stocks were set to open just fractionally lower after stocks in China fell about 3% overnight.
And while our new era of negative interest rates, a divergence in major central bank action, and a ever-declining expectations for global growth may still have markets on edge, US stocks — the most visible and closely-watched financial markets among the world’s major economic force right now: US consumers — are done reacting to this news.
This fall in Chinese stocks came as the People’s Bank of China announced Monday that it cut the amount of cash banks must hold as reserves — the fifth cut its made since February 2015.
And as Tom Orlik, chief Asia economist at Bloomberg, wrote Monday that this move, “should add impetus to already heady credit expansion, bolstering short-term growth. By signalling heightened concerns from policy makers, it also risks adding to market fears and downward pressure on the yuan.”
Orlik added that, “Even though it lacks the bazooka force of an interest rate cut, the RRR cut is still high visibility and ultimately works by lowering rates. That will mean additional downward pressure on the yuan. The price in foreign exchange reserves that the PBOC will have to pay — if it continues to favour yuan stability — just went up.”
Now, this is a big deal for hedge funds that have loaded up on bets that the yuan will fall in value this year.
The most notable of these bets is being placed by Hayman Capital’s Kyle Bass, who wrote in an investor letter earlier this year:
What we have come to realise through these discussions is that many have come to their conclusion without fully appreciating the size of the Chinese banking system and the composition of assets at individual banks. More importantly, banking system losses — which could exceed 400% of the US banking losses incurred during the subprime crisis — are starting to accelerate.
The last several months, however, have conditioned investors to sell stocks as China sells off with vague worries about economic growth in China and potential risks posed by their banking system serving as supposed reasons to sell US stocks.
And while this trade always had its origins in the sort of cryptic “sell something to sell something” justification, markets in the US are finally realising that issues in China are issues in China.
Said another way, news out of China that may or may not have a direct impact on the future cash flows of US businesses is no longer a reason to sell stocks.