Stocks opened significantly lower this morning on rough economic data out of China before reversing to rally modestly through noon. The Dow, S&P, and Nasdaq Composite all gained, with tech leading the way.
Beijing got the trading session off on the wrong foot after revealing some major economic setbacks. Chinese retail sales, industrial output, and investment readings all missed estimates. The unemployment rate for those aged 16-24 soared to 19.9%, hitting a record high as well.
“July’s economic data is very alarming,” noted Raymond Yeung, Australia & New Zealand Banking Group’s chief China economist.
“Authorities need to deliver a full-fledged support from property to Covid policy in order to arrest further economic decline.”
China’s central bank then unexpectedly cut rates. Concerns over the Chinese economy have been building for weeks. Many investors saw today’s rate cut as confirmation that China’s recovery is quickly crumbling.
“The rate cut shows the entire economy is in trouble,” said ING Groep NV strategist Iris Pang.
Worse yet, some analysts believe that rate cuts alone will be unable to save China.
“Beijing’s policy support could be too little, too late and too inefficient,” said a group of Nomura analysts led by the bank’s top China economist, Ting Lu.
“We think markets are too optimistic about growth in the second half, and we expect a new round of cuts of growth forecasts in coming weeks.”
That’s very bearish, and not just for China. US stocks should get rocked, too, if Beijing melts down.
But before that happens, something else might do the trick:
This Wednesday’s FOMC meeting minutes release.
“For the next two weeks, the Federal Reserve should be preparing markets for a reminder from the Fed Chairman at Jackson Hole that the FOMC needs to get to a positive real policy rate, which means rates will be higher for longer,” said Michael O’Rourke, chief market strategist at JonesTrading, in a note.
“That messaging will start in a meaningful way this Wednesday with the FOMC minutes. The Cold War with China is escalating, thus inflation will be more stubborn than hoped for. If there are investors who are looking for a second chance to exit this equity market, this is it.”
O’Rourke is, of course, addressing the “buy-and-hold” crowd that never bailed on their positions prior to 2022’s bear market. He says this is their “second chance” to exit at favorable prices.
I’d argue that it may be their last chance for quite some time.
Despite the market’s massive rally over the last few weeks, bearish positions continued climbing. Net-short non-commercial S&P futures positions, which serve as a good gauge of bearish sentiment for stocks, just hit a high last week unseen since June 2020.
The data is current as of last Tuesday. That means it doesn’t include position data after the S&P’s big Wednesday-Friday surge, which was likely driven by bears rushing to cover their shorts following the cooler-than-expected July CPI print.
Regardless, the data suggest that there are plenty of bears still out there. And, more importantly, they’re refusing to budge no matter how high stocks go.
When the FOMC meeting minutes are released this Wednesday, bears may finally get the trigger they need to drive stocks lower. Plus, the vast number of bears should contribute to a hasty descent if one arrives.
That’s not what bulls want to see at the top of a dizzying rally, especially amid a Chinese economic collapse that its central bank seems incapable of avoiding.
