China regulatory moves are bursting bubbles

Local market had another choppy positive day on the back of the miners updates. We are on the seventh week without a double-digit turnover day. Markets are on holding pattern ahead of US reporting cycle, US Fed update and China regulatory moves. Aussie inflation update tomorrow but no one cares when we are stuck in recession fears. Size mattered with Large Caps being the best while Small Caps being the worst. Miners and Energy lead the sectors while Tech and Health Care were the worst. We now have Japan, NZ, China and Hong Kong markets trading below 200 day moving average. History suggests elevated risk ahead. It could be different this time!

China regulatory crackdown risk has been rampant through the tech sector and then moved into education sector. They has been flagging that they will move to curb commodities exuberance. Today there were media articles were flagging potential limits on lending into property sector as well as tariffs on Chinese steel producers. Given the track record in the Tech sector, ignoring China regulatory risk is fraught with danger. If you are hoping for policy backflips after recent years of geopolitics between Australia and China, it may take a while. It could be different this time!

Australia inflation update for Q2 is out tomorrow. The market expects 3.75-4.00% while real world experience suggests 6.00-8.00% and RBA core near 1%. It makes no difference for rate cycle or tapering. RBA will not taper. They gradually moved their target from inflation to job market expectation that was never going to happen before recession worries. Now they will be preparing the market for more tapering. Given the opposition backflip on tax policy, we are likely to see no reform and fantasy budgets for decades to come. RBA will end up buying houses and equities indirectly in the next 4-5 years. Australia is sitting on peak asset bubbles with historical high stimulus and zero rates while the economy falls into recession risk due to bad pandemic management. Everything is linked to the commodities market. If commodity prices roll over, the rest of the asset bubbles will follow. Probably not the best time to pick a fight with China. It may be different this time!

US earnings season takes center stage this week with mega caps reporting. US reporting season is on 90% strike rate and that is already priced in. Time will tell if the market moves higher on sentiment or sells on the update. US Fed update coming on Thursday. It will be interesting to see how they spin fudging the bond supply lower and QE buying higher. Volatility will be elevated this week.

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