The S&P 500 continues to hold on to its gains, with any down day resulting in Federal Reserve members rushing in with their "we have many more tools at our disposal" comments. However, there is a lot more happening underneath the surface than at the broad index level.
The S&P has been in a narrow, 150-point range for weeks now. Sector rotation has helped in technology names outperforming every day, for right reasons, versus the likes of energy, financials and industrials. It may seem like a bull market, but in essence it is only a bull market in the technology space as these stocks are now the new-world bond proxies. This has helped the S&P 500 rally 40% from its March lows and just shy of its year-to date highs despite all that 2020 threw at the markets.
The top five stocks are up 35%-plus while the remaining members on average are down small. In comparison, other markets have not benefited as much, especially Europe, China and most other global indices. Since 2018, the S&P 500 is up 11% vs. the Chinese market down 16%. That is a huge disparity and China will want to address it at some point.
China realizes that the Fed is using the broader index to goose stock prices and asset valuations as that is the only way to indirectly boost the consumer. After all, higher 401(k)s and asset prices will mean more disposable income for U.S. consumers to spend and thus boost U.S. GDP along with China's own prospects.
In the past week, China's CSI300 Index, consisting of the largest companies in Shanghai and Shenzhen, has rallied 14%. Of course, China has pumped quite a bit of money into its economy after its initial lockdown, but what caused the markets to move that much in the past week?
Earlier this week, China's state-owned media published an editorial that "it is important to foster a healthy bull market." That was all it took, and markets shot up on Monday, taking all the Chinese indices and Chinese entities listed in the U.S. higher. This was reminiscent of China's 2014-2015 bull market, which saw the market double in about six months. You may remember how it ended in 2015, but that could be some time away.
Markets across the globe have fundamentally distanced themselves from their profits and economic reality thanks to central banks flushing the system with heaps of liquidity. One cannot fight the new world order. Liquidity trumps fundamentals.
Earlier this week the yuan started rallying aggressively from 7.10 up toward 6.98 versus the Dollar. Something is clearly brewing. Perhaps China is worried about the massive capital outflows year to date and is looking to attract capital back to its shores. It also could reflect geopolitical tensions between U.S. and China on the issue of Hong Kong, with potential sanctions put on China.
One thing is certain: China will do whatever it takes to make sure its GDP growth average meets its target even if it means going against its plans to break away from industrial investment towards consumer investment. The fastest and quickest way to spur GDP growth is to boost infrastructure spending.
This is yet another tailwind for copper. It also helps that copper is one of the tightest commodity markets out there, with deficit to surplus oscillating between 100,000 tons. We know the supply side, but demand is the unknown. If we do enter into recession mode, no doubt the price will be crushed. But as central banks are jumpstarting their economies, it will continue to benefit the most, especially at a time when supply is capped due to mine closures on back of coronavirus and no large copper expansion projects to come in near future.
The Chinese dragon may have been resting over the past few months, but it has awoken now and has a long way to go before catching up to the U.S. markets.