Will China tightening spook the markets? That’s the question UBS’s global macro strategists Bhanu Baweja and Manik Narain ask and try to answer in a recent global macro research report. The report considers the current state of the markets. Specifically, while US investors appear to be relatively unconcerned about the world’s economic problems with market volatility near a 25 year low, metal prices are telling us a different story about what’s happening in China – the answer could depend on what happens in the Asia Tech market.
Will Asia Tech Crash Spark The Next Market Collapse?
Over the past year, the China crisis story has fallen by the wayside as analysts have concentrated on Trump’s election and what his potential policy changes may mean for global growth.
Chinese policymakers have also put in place some measures to slow capital outflows stabilize the CNY and begin to de-lever the country. UBS’s analysts argue that the changes China has made over the past year should ensure that any negative impacts from falling commodity prices will be fairly limited. Commodity companies such as miners and steel producers will feel the bulk of the pain, and if “forwards have it right, this seriously limits the collateral damage from a China slowdown to global financial conditions.”
The one change that could destabilize China’s temporarily calm is a turn in the Asian tech cycle, which according to Nick Gaudois, UBS’ head of Asia Tech Strategy is likely due “for a pause after a very strong run.”
A slowdown in tech growth may reverberate around the region when coupled with lower commodity prices. If the more commoditised parts of the tech suite such as memory see a sudden drop in value, it may mean lower Asian export values, and this could, in turn, weigh on more dominant items such as China housing. This subtle shift may not lead to immediate pain but if it leads to falling property prices than Chinese investors may respond by turning to foreign assets, putting renewed pressure on the currency, and changing the game once again:
“The Asian tech cycle is likely due for a pause after a very strong run according to Nick Gaudois, UBS’ head of Asia Tech Strategy. From a macro perspective we have tried to get a sense for this sector from San Fran’s Tech Pulse, shipments to inventory ratios for this sector in Japan, Korea and Taiwan sectors, and details of US durable goods orders. All these numbers remain strong as of the end of Q1, but since then there has been a modest drop in the prices of the more commoditised parts of the tech suite such as memory. A further decline may be an important turning point. This along with weaker commodity cycle may mean lower Asian export values, and change the view on Asian local earnings and the FX.