The Trade War is becoming almost like yesterday’s news. We are increasingly getting the Brexit news feeling, constant headlines, but with little meaning.
Markets will continue to move on tweets and headlines on the topic, but several of the more directly affected assets have already made big moves. The question is whether there is room for a snap back bounce.
Shanghai Composite put in a strong candle today, right on big support levels. Volumes have been poor for weeks and continue to be depressed, but should Chinese indices start bouncing, we would most probably get a revival of volumes.
The offshore yuan has gone one way only since late April. Recently the Chinese FX has been finding some bids, and today we got warned “about shorting the Yuan”. Further short term weakening of the yuan looks a bit stretched.
If Chinese shares are cheap or expensive nobody knows, but the biggest China ETF, FXI US, has sold off heavily over past weeks, reaching the 40 level. We are closing in on the big levels from October and January lows, still some 3% lower, but the contrarian in us is starting to get excited about a bounce in this battered ETF.
Timing the possible low is not an easy task, so leaning into a position here looks like the right way to trade the set up.
Should you like to express the view via options, buying premium is cheaper than in a long time. FXI US implied vols have come off lately offering interesting plays such as call spreads.
Being bearish China here is a late trade, we would look to start leaning in the early longs here.
After all , there is some blood on the streets…
Source, Charts by Bloomberg