After 10 days of an uncontrollable rally, the Chinese market has found itself hitting a wall. Today, the Shanghai Composite index slid 6.6%, while the blue-chip CSI300 index declined 7.1%. Both indexes took their biggest one-day hit since Feb 2020 and also snapped a 10-day winning streak. As you can see below, the announcement of a comprehensive stimuli package two weeks ago, pushed the equity indices to a 23%, 10-day winning streak. But the lack of clarity in terms of timing, amount and implementation details, has put the rally on ice. What the market wants is a “whatever it takes” statement like the one Mario Draghi gave when he was the head of the ECB, followed by clear actions to demonstrate their committment to it. The two tails of the distribution of outcomes are present here: (1) if no stimulus is finally implemented or is perceived as not enough, the market will likely tank, erasing the gains obtained so far and probably sinking even more. And (2) if the bazooka package is announced, the rally will continue, and likely accelerate, putting pressure on the currency and perhaps starting a second inflation wave. The devil is having fun with the details.
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