Something for your Espresso: Dragons, Doves, and Deutsche Drama: A Global Economic Soap Opera

Morning from Copenhagen,
Yesterday, PBoC Governor Pan made headlines, hinting at further intervention on the horizon. It now appears that top Chinese leaders have entered a closed-door meeting ahead of the Central Economic Work Conference scheduled for next Wednesday—an event the market has been eagerly anticipating.
China’s current economic landscape, however, remains far from ideal. Liquidity is underwhelming, inflation expectations continue to decline, and growth seems to be propped up artificially. Notably, this meeting occurs against the backdrop of authorities allowing the Yuan to depreciate further.
Given the current sentiment and the abundance of negative news, it wouldn’t take much to trigger a rally in the Chinese stock market. That said, we’ve been let down more than once in similar scenarios, so it wouldn’t be surprising if this pattern of disappointment persists.
The key metric to watch from here is USDCNH. A weaker Yuan against the Dollar serves as a direct counter to the implementation of tariffs. This raises the question: could this time be different, and might the much-discussed 7.3 level fail to hold? It reminds me of last summer when the BoJ removed the 0.1% cap on JGBs, liberating bond yields in one swift move. Here, we might witness the reverse—bond yields collapsing if there’s any indication that the Chinese government is prepared to tolerate a weaker Yuan.
However, it’s also noteworthy that CNH had rebounded marginally on the latest news which shows that as long as markets find the credibility around stimulus (and the sovereign credit) to be intact, a currency will gain from a wave of stimulus. For now, I don’t think there is any credibility left around the content of the Chinese stimulus, but the sovereign credit is still OK, meaning that bond yields will continue to drop most likely.
Japan is seeing some very decent momentum in equity space after the return target is allegedly going to be raised for the GPIF – the world’s biggest investor. The divergence case in long bond yields in Japan and China remains incredibly solid from a macro-trending perspective.
Chart 1.a: China is the new Japan
China’s Yuan slides as stimulus whispers grow louder, the Fed hints at a December rate cut despite its September reaction function misaligning with current data, and Germany struggles with rising wages amid industrial decline
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