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22V Afternoon Shoot Around: China Policy Move Easing RoW Concerns and Supporting Laggards

Published on January 24, 2024

Dennis DeBusschere

Bottom Line: Equity markets started the year with a risk-off, large cap, Defensive rotation that was largely the reverse of trends coming out of 4Q23. As a reminder coming out of 4Q23 macro readings were firming, pointing to improved growth. And non-equity market conditions, credit in particular, were supportive of a continued risk-on rotation. Fast forward to today, market internals and macro trends have diverged broadly, macro conditions remain firm, and that creates a good setup for rebound in small cap/risk-on trades. Recently we have seen some reversal in the market internals narrowing the gap with macro series.

Relevant News: The S&P US Composite PMI came in better than expected on the back of a beat by both the manufacturing and service components. 22V’s economist notes that the print seems consistent with the idea that we’re getting some better visibility for firms into 2024 amid a gradual troughing and potential bounce in firm sentiment.

Things to Watch: (1/25) GDP, (1/26) PCE, (1/31) ECI & FOMC, (2/2) Payroll, (2/9) CPI Revisions, (2/13) CPI.

China Strategy: Reserve Requirement Rate Cut Provides Short-Term Support for Markets

The People’s Bank of China (PBOC) announced a 0.5 percentage point cut in the reserve ratio for banks, with the largest banks now at 10%. Additionally, PBOC will reduce interest rates on targeted lending programs for small businesses, aiming to boost confidence after a weak start to the 2024 equity market. These moves are incremental support for growth, but they do not represent a shift in China’s stimulus strategy. The timing was expected, but the size of the cut was notable as the PBOC’s goal is to show active support for the economy and address the recent market sell-off. Beijing’s strategy focuses on supporting GDP growth but may not address underlying demand issues, potentially constraining Chinese equities amid deflation concerns.

Quant: Market Internal Starting to Narrow Their Divergence with Macro

Financial conditions have been roughly flat this year, while risk-off significantly outperformed. The outperformance of large caps relative to small caps have also diverged from their relationship with changes in high yield spreads.

The indices’ relative performance with 10yr yield also diverged from their historical pattern, leading to higher spread between them. Some rebound from small cap names should be expected to narrow the spread between them.

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Technical Analysis: Upside Gaps in the R2K/IWM

Since the 10/27/23 low the R2000 is up 21% with nearly all the gains occurring on 6 trading days that included 5 upside gaps. Check your daily charts to see the gaps on Nov 2 (+2.7%), Nov 3 (+2.7%), Nov 14 (5.4%), Dec 14 (2.7%), and Jan 22 (2%). Dec 13 was a non-gap day where the index added 3.5%. Upside gaps may be the way things are going to be for this index – 22V’s Technical analyst wants to own the IWM and wait for the next upside gap.

Russell 2000 – Daily w/ 50- and 200-Day MAs and MACD

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