MNI CHINA MONEY WEEK: China's Reflation Trade Resuming?

--Ongoing Equity Rally Calls Into Question Bond Bull

By Stuart Allsopp

     SINGAPORE (MNI) - We have highlighted over recent months the upside

potential in Chinese equity markets and the upside risks this poses to rates

given widespread expectations for the People's Bank of China to continue easing.

     With the Hang Seng extending its gains to fresh cycle highs Friday and

Mainland indices also showing strength, the bond bull market is facing risks.

     The China stagnation trade was highly successful in 2018 with stocks

entering a bear market and bonds rallying strongly on PBOC easing and

expectations of more to come. The recovery in the equity market has seen stocks

outperform bonds so far this year, as bonds have traded sideways. 

     With both the yuan and Chinese stocks continuing to shrug off headlines

surrounding trade talk obstacles, markets may be reflecting some underlying

resilience in the Chinese economy.

     It is not particularly unusual to see China continue to ease in the face of

a rising stock market, as we saw in the first half of 2015. That said, equity

market bottoms have tended to lift rates, as was the case following the global

financial crisis, the 2010 equity market dip and recovery, the early 2012

bottom, and the early 2016 bottom.

     We still see the path of least resistance as being lower for USDCNH as

bearish speculative positioning unwinds, but would need to see higher bond

yields relative to the U.S. to suggest a sustainable recovery given how extreme

the current yield difference has become. 

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,M$$FI$]