1/10/16
Global financial markets have opened the year with selling and elevated fear. And it’s been led, again, by China. This brings back very fresh memories of August of last year, when a Chinese devaluation set off confusion in markets, sharp selling in Chinese stocks, which spilled over to global markets.
This actually plays in perfectly to what we expect to be the biggest theme of the year for markets – a surprisingly aggressive action from China to stimulate their economy and, in turn, fuel the global economy and a recovery in commodities. The behavior in Chinese stocks and the Chinese currency in the past few days underpin that investment thesis, and likely put policymakers in China in position (under pressure) to act sooner rather than later.
Billionaire investor David Tepper, the man that bought the bottom in banking stocks in 2009, and later completely changed broad stock market sentiment in 2010 by interpreting the Fed actions as a green light to buy stocks, has predicted that the Chinese central bank will give global growth and global demand a shot in the arm this year, by aggressively cutting rates and stimulating their economy through a variety of measures that will surprise the consensus view.
If Chinese policymakers do indeed act, and aggressively, this chart on commodities could represent one of the great trades of the decade. Remember, when China rolled out aggressive stimulus in 2009, they began stockpiling commodities that were trading at dirt cheap prices in the depths in the global financial crisis. Further, devaluations of the yuan help the Chinese rebuild currency reserves. What have they done with those reserves historically? They buy a lot of U.S. Treasuries. They buy a lot of commodities.
The chart above shows the Goldman Sachs Composite Commodities Index trading into a triple bottom and 16-year trendline support.
Related: Stocks, Investing, Markets, Fed, China, Apple, Bonds