Spectators watch the solid-propellant carrier rocket Smart Dragon-3 (SD-3) rising from a sea-based platform off the coast of Haiyang in east China's Shandong province (TANG KE/ Getty Images)

China shop

Traders are enthusiastic about Chinese stocks. Their economy? Not so much.

Chinese stocks are surging, but the shares of US companies that sell things to China aren’t.

Luke Kawa

10/4/24 11:28AM

Stimulus announcements have spurred a rally in Mainland Chinese equities stronger than anything the S&P 500 has ever enjoyed.

One key question as traders continue to digest the implications of this policy shift in China: Is the skyrocketing stock market reflecting what’s about to happen to the economy or not?

So far, market internals are suggesting that the answer is “not.” At least, not enough that the spillovers will be a big positive for the companies that sell things to China.

A basket of stocks collected by Goldman Sachs of US companies that have significant sales exposure to China (excluding semiconductors) is outpacing global equities by about 2.2% since September 23, the day before the first round of policy announcements landed. That contrasts with a near 40% outperformance for the Xtrackers Harvest CSI 300 China A-Shares ETF, which tracks the Mainland China benchmark CSI 300 Index.

The view that this is more of a stock market story than an economic one is shared by many prominent China watchers.

“The pivot thus far is more beneficial for Chinese domestic equities than it is for real growth and commodity demand; officials have signaled new determination to boost equities, but not yet the follow-through on fiscal stimulus and property support necessary to rejuvenate activity,” writes Michael Hirson, head of China research at 22V Research.

To compare the stock market’s view to the bond market’s: the CSI 300 erased more than a year’s worth of losses before the Golden Week holiday started. But Chinese 30-year government bond yields — which incorporate the market’s long-term views on domestic growth and inflation outcomes — haven’t even made it back to where they were at the start of September.

“The implied equities put means investors have a (temporary) backstop after many years of suffering,” writes Shehzad Qazi, managing director at China Beige Book International. “But no, Dr. Xi did not wake up one morning and decide to reverse the past six years of tough medicine.”

Some of the US stocks that have benefitted the most from Chinese stimulus announcements are casino operators in the region like Wynn Resorts or Las Vegas Sands, up about 31% and 25%, respectively, since September 23. The outlook for such companies is much more tied to Chinese stock markets (and household wealth) than Chinese economic activity.

For macroeconomically-sensitive assets, it’s become more of a mixed bag.

“Copper and the Australian dollar appear to be listening to the Chinese stock market right now because both are being driven higher by a third variable (Chinese stimulus announcement effect and the Xi put in Chinese stocks),” writes Brent Donnelly, president of Spectra Markets, in an October 3 note. “But the stock market is a policy target, and copper is not, so there is no guarantee that once this announcement effect dissipates, Chinese stocks and copper won’t decouple.”

Max Knoblauch & David Crowther11h

Nike’s China business declines for seventh straight quarter, stock sinks as soft guidance outweighs Q3 earnings beat

Sportswear kingpin Nike reported results for its third quarter, which ended in February, after the bell Tuesday. At a headline-level, the fiscal Q3 numbers were pretty solid, with Nike reporting:

Earnings of $0.35 per share, comfortably above the Wall Street consensus of $0.29 per share compiled by FactSet.
$11.28 billion in total revenue, roughly in line with the $11.26 billion estimate.

However, weakness in China and a revenue forecast that implies sales will continue to drop are weighing on the shares, which are down more than 9% in early trading on Wednesday.

On the earnings call, management said that revenue is expected to drop 2% to 4% in the coming quarter, and that overall they "expect revenues to be down low-single-digits versus the prior year, with gains in North America offset by declines in Greater China." That's a disappointment to analysts, who were anticipating 2% growth in the coming quarter, and even more in the latter stages of the year, per Bloomberg.

Nike’s sales in China — where the company earns about 15% of its revenue — fell 7% to $1.62 billion. That’s its seventh straight quarter of sales declines in the market, though this quarter’s was less than feared. The company had issued weak guidance for this quarter considering continued softness in the region.

“This quarter we took meaningful actions to improve the health and quality of our business,” said Nike CEO Elliott Hill. “The pace of progress is different across the portfolio and the areas we prioritized first continue to drive momentum.”

Nike shares are trading near decade lows this month, as tariffs continue to weigh on profits and shipping costs rise amid the war with Iran. As of Tuesday’s close, the stock was down 17% year to date.

Luke Kawa, Tasha Matsumoto

11h

Stocks end worst quarter since 2022 with best day since May

Optimism that the end of the war may be near sent stocks surging.

Max Knoblauch13h

Oil-sensitive travel stocks pop following Iran state media reporting on potential war resolution

Travel stocks are surging on Tuesday as oil prices fall following reports from Iranian state media that President Masoud Pezeshkian said the country has “the necessary will to end this war,” but would only do so with guarantees that “prevent the recurrence of aggression.”

The war has sent oil prices and refining margins surging this month, causing airlines and cruise lines to cut profit forecasts despite reported high demand.

Following Tuesday’s update, shares of the big four US airlines (Delta Air Lines, United Airlines, American Airlines, and Southwest Airlines) all climbed, along with smaller rivals including JetBlue. US airlines have stopped fuel hedging in recent years, increasing their exposure to upward swings in oil prices.

Cruise stocks also rallied, with Carnival and Norwegian up more than 6% and Royal Caribbean up about 5%.

J. Edward Moreno16h

The FDA is expected to lift restrictions on certain peptides, the NYT reports

The Food and Drug Administration is expected to lift restrictions on certain peptides, allowing the experimental, often injectable substances to be sold by compounding pharmacies, The New York Times reported Tuesday.

The potential move was previously reported by The Wall Street Journal, and teased by Health Secretary Robert F. Kennedy Jr. on the “Joe Rogan Experience” podcast in late February.

Peptides have boomed in popularity recently, with search interest for “peptides” surpassing “ozempic” this month. Many of them are currently understudied and not approved for human use, a rule consumers are able to bypass by purchasing them from suppliers that sell them for, ostensibly, research purposes only.

As reports of the FDA changing its stance of peptides mount, consumer health companies like Hims & Hers and Superpower have been getting ready to roll out their peptide offerings as soon as they get the FDA's blessing.

The peptide gold rush: How impending deregulation could supercharge a shadow industry

Matt Phillips16h

Memory stocks bounce as Bernstein analyst calls TurboQuant fears “overdone”

Memory stocks rose Tuesday, after Bernstein analysts called the recent panic over Google’s TurboQuant AI algorithm “overdone.”

Bernstein analyst Mark Newman wrote:

“[Hard disk drive] and Memory stocks have sold off significantly due in part to fears from Google’s TurboQuant report. This however, should have zero impact on HDD demand and negligible impact on NAND demand. Given the stock sell-off we see this as an attractive entry point for Seagate Technology Holdings, Western Digital and Sandisk’s and upgrade WDC to Outperform.”

All three stocks were up early Tuesday, as was memory chip maker Micron.

Today’s rally stands in stark contrast to the pummeling these shares have endured over the last week, after Google Research published a technical paper on March 24 detailing its TurboQuant AI algorithm, which compresses the amount of data associated with AI operations without affecting the accuracy of AI models.

That was seen as a threat to surging AI demand for memory storage, which has supercharged prices for memory chips and memory-related stocks over the last year.