China

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.

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