Saturday, February 8, 2020

Is the melt-up back?

What should investors make of the market's recent air pocket and subsequent recovery? John Autthers, writing at Bloomberg, proposed an analytical framework where investors view the coronavirus outbreak mainly as a China problem. The MSCI World with China exposure (blue line) has been far more volatile than the MSCI World Index (white line). The companies with high China exposure have tanked in response to the virus scare and dramatically underperformed global stocks.

While global investors fret about the economic impact of China's slowdown in the wake of the coronavirus infection, the PBOC has responded with a tsunami of liquidity to support the market. Moreover, extraordinary measures have been put in place to forbid short selling, and to discourage major shareholders from selling their shares. In response the Asian stock markets have rocketed upwards after a brief corrective period, and global markets have followed suit with a risk-on tone.

These policy responses beg two obvious questions. Is the melt-up back? If the market is focused mainly on China and the coronavirus, should investors even try to fight the PBOC?

The full post can be found here.

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