Yesterday saw some significant moves in several key macro factors. The charts below detail the sharp escalation in China stress (at the national, rather than real estate sector specific level) & the impact that had on broader risk appetite in markets.
The Evergrande story has been in motion for months. Up until yesterday, contagion had been restricted to immediate peers – Chinese real estate / financial names, a few Australian miners.
What changed yesterday was the move in Chinese Credit Default Swaps (CDS). Sovereign CDS liquidity is poor but the signal is unmistakeable – markets moved this from an idiosyncratic story to one with potentially far broader ramifications.
For the first time in a while the risk off move had a material impact on the credit markets – "European financial" & "high yield" bonds especially. Again, our models suggest this is very much a statistical abnormality.
The spike in VIX was a significant move on Qi models. VXEEM, VDAX (implied volatility measures for emerging markets and the DAX respectively) & the gold/silver ratio experienced similar moves.
What next?
China is the epicentre of current market moves & your view on how the Evergrande story unfolds is critical. China bears will see these factor moves as a genuine re-pricing. If so, Qi can high-light those markets that are lagging versus the new environment.
In times of stress it is more important than ever to quantify relationships between asset price & the macro environment.
LOOK UP™
The Evergrande story has been in motion for months. Up until yesterday, contagion had been restricted to immediate peers – Chinese real estate / financial names, a few Australian miners.
What changed yesterday was the move in Chinese Credit Default Swaps (CDS). Sovereign CDS liquidity is poor but the signal is unmistakeable – markets moved this from an idiosyncratic story to one with potentially far broader ramifications.
For the first time in a while the risk off move had a material impact on the credit markets – "European financial" & "high yield" bonds especially. Again, our models suggest this is very much a statistical abnormality.
The spike in VIX was a significant move on Qi models. VXEEM, VDAX (implied volatility measures for emerging markets and the DAX respectively) & the gold/silver ratio experienced similar moves.
What next?
China is the epicentre of current market moves & your view on how the Evergrande story unfolds is critical. China bears will see these factor moves as a genuine re-pricing. If so, Qi can high-light those markets that are lagging versus the new environment.
In times of stress it is more important than ever to quantify relationships between asset price & the macro environment.
LOOK UP™
