Credit conditions tightening in China

Could exacerbate broader sell-off

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For those not invested in the “meme” stocks that shot up last week, those market moves last week nevertheless had big consequences, by triggering broader market weakness as some big hedge funds were forced to scale back risk. That might not have been the only factor at play in the broader market weakness, as our chart of the day shows that credit conditions were also tightened sharply in China. The interbank overnight rate there jumped by over 2%-points to its highest since 2015, and those higher funding costs may have caused some investors in the country to scale back their positions as well.

Macro

The US data showed consumption slowed again at the end of 2020, although the gap between that and personal income shows the saving rate remains unusually high.

In the eurozone, GDP growth was generally stronger than expected in Q4, although the performances were still bad.

Canada’s economy surprised to the upside in November as well, though GDP is still almost 3% down from a year earlier.

Markets

The sell-off continued on Friday, with most indices notching up falls of almost 2%.

The cyclical sectors generally lead the decline last week, though real estate was unusually resilient.

One sign that this was a sell-off prompted by forced selling was that bond yields also rose across the board; when a sell-off is prompted by fears about the economic outlook we would normally see yields fall.

Likewise, these indices of risk-on and risk-off trades both declined - that also happened during the peak off the market stress in March (after risk-off trades initially did well).

The VIX rebounded on Friday, and the MOVE index of implied bond market volatility also rose, though remains comparatively lower.

One asset to escape the sell-off was silver, amid signs the WSB community were all intending to go long. Indeed, it looked set to gap up once markets opened late Sunday (after this has been written).

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