(More) Sino Led Sliding

Well the US didn’t do much of note, a 1% cyclical led rallyette on very light volume which the futures reversed once China rolled over 4+%. As mentioned yesterday, it really does look like China is leading the market at the moment. You can point to the credit indices and sure, they did start to widen last week and have continued to do so today, but China started falling first and it is the China moves which are the catalyst for rest.

This all makes things fairly uninteresting in Europe and the US, and this reticence to trade is understandable as you’re effectively placing bets and waiting to see what whim takes China overnight. You may have a long term view, but there's still something unnerving about not being awake for the events that move your names.

Not to be undone by lack of equity action, we’ll find something else to talk about. With this recent move downwards, we started to see the re-emergence of charts showing us where we are in the cycle versus previous bubbles. Check this chart on PragCap, lifted from DShort:
While not predictive, it is instructive, and just as we priced in the worst case back in March, I think we’ve been pricing in the best case during this recent rally. The latter seems very unlikely to materialise given the lack of sound underlyings, such as continued weakness in the consumer, revenues and inflation, and the former, well there’s still plenty of unknowns out there; what happens when all the ARMs reset etc. So we don’t know if the lows will continue to hold that dubious honour although it does seem unlikely anyway that quite the same level of fear will re-enter the market. Anyway, as the market reflects and the number of these charts being passed around increases, it only serves to make investors more cautious.

Speaking of caution, one person who definitely seems cautious in his outlook is the MPC’s Mervyn King. With the release of the minutes today, we were served quite the surprise. Now the decision to extend QE to gbp50bn caught the market off guard, so the news that 3 of the 9 members (Merv included) actually wanted to bump it up to 75bn, was even more of a shock. He’s made it known the UK really can’t support a strong pound at the moment and he’s definitely worried about doing too little rather than too much. Given the news from the release today, I’m a bit surprised not to see GBP a touch weaker. Perhaps it wasn’t such a shock to some or perhaps we'll just have to wait and see what China made of it?