04.06.2024 Issuer Call Redemption Notice

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China Growth Slowdown, Euro Rate and Oil Drops

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Towards the end of the XPeng article published recently, it was mentioned that Emerging Markets are rising in valuation relative to U.S. stocks. Added to this is a report from Goldman Sachs earlier this month stating that “weak US dollar cycles tend to bode positively for emerging-market assets” that supported this trajectory. The report also states: “Given the nature and sequencing of the Covid crisis and reopening aftershocks, the past few months can be characterized as falling EM growth forecasts with outperforming growth differentials” while promoting the attractiveness of the MSCI China Index and early-cycle emerging markets in Southeast Asia.

With regard to China, however, alternative data seems to suggest that this attractiveness might be overstated. In what could be considered as the first sign that China’s economic growth might not be a strong given, real estate data already indicates a steadily increasing dip in monthly sales over at China:

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

The second sign is hidden in travel statistics. Alternative datasets from satellite-driven observations lead specialists to estimate that both freight and travel have still not recovered:

The third sign was that retail sales aren’t exactly showing similar growth trajectories seen in 2020 (i.e. before the pandemic induced a slowdown):

The fourth sign was that steel stockpiles are at all-time highs relative to all of last year and this year. Steel stockpiles are a key feature for identifying if inventories of finished goods are being exhausted or not:

Another sign of Chinese citizens feeling the pinch has been recent reports suggesting that buyers in over 100 projects spread out across 50 cities in China have halted payments. Altogether, the property sector accounts for 25% of China’s GDP, with at least 4.5% of all outstanding mortgages in China expected to be affected.

Unsurprisingly, the median forecast for China’s growth for the year has been lowered by investment banks to a median of 3.4% – with Goldman Sachs holding the higher end of the estimate at 4%. The Chinese government had announced a growth of “around 5.5%” in the BRICS Summit in June.

Also unsurprisingly, China’s Ministry of Finance is considering allowing local governments to sell $220 billion worth of “special” local bonds in this year’s second half. The bond sales are reportedly being brought forward from next year’s quota since local governments typically don’t sell debt until January 1. Given the centrality of infrastructure spending to Chinese economic growth, local governments are being asked to propose and start new projects as soon as possible.

Meanwhile, the US dollar is gaining strength, which is another sign of an expectation of US recession. Despite declines in U.S. dollar purchasing power (as indicated by high inflation), many traders and strategists are expecting the Euro to break past the psychological barrier of $1.00 and go down to $0.9850 on a short-term basis as more investors seek refuge in the US dollar rather than be invested in the market. In expectation of the Euro breaching the $1 barrier, shorts in Euro positions have substantially increased last week.

As last Monday’s article indicated, there is a relationship between the plunge of the Euro’s valuation and the European economy. While both the S&P 500 and the DAX had intraweek recovery of 0.2 and 0.3% respectively, neither have recovered the highs from last Friday. What makes the situation grim for both indices is that June’s Consumer Price Index was 9.1% over the past year, the biggest yearly increase since 1981.

The CPI doesn’t really translate to an “average” increase in costs for the American consumer; it’s merely a directionality indicator for U.S. policymakers to decide on enacting reforms. In actuality, while petrol have shown the biggest change, household items such as eggs, electricity and general groceries have also seen substantial increases.

Now, while Brent prices have fallen to pre-“Ukraine invasion” levels last week, the extent of price increases in other non-energy items – which aren’t solely attributable to corporate price gouging – indicates that relief at the pump wouldn’t necessarily lead to relief for household savings. As it stands, figures released last Wednesday by the US Energy Information Administration suggested petrol demand had slipped to its lowest level for this time of year since 1996 which has many implications, some of them of a more fundamental nature on the economy (as opposed to just household savings).

Furthermore, given the high historical (and recent) correlation in inflation between the U.S. and Europe, it can be expected that similar trends will be seen in Europe as well.

In Conclusion

The facts presented should drive home the idea that even holding high-conviction Chinese assets might not prove to be an effective countermeasure for any of the risk posed by the weaknesses in both U.S. and European economies. If anything, the facts presented along with ever-increasing US Dollar Index level indicates that the recessionary phase continues to loom larger than before.

While this doesn’t bode well for “core” investments, there are alternatives available for tactically capitalizing on short-term trends in “satellite” investments.

Learn more about Exchange Traded Products providing exposure to top Chinese stocks for the upside here and the downside here. Similarly, learn more about DAX-related products for the upside here and the downside here.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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