Volatility remained higher than normal last week, with the VIX Volatility Index reaching 21.3 – slightly above its long-term average of 20. However, this was lower than the previous week’s reading of 23.25 and significantly down from 2021’s high point of 37, which was recorded in January. Ten-year US Treasury bond yields also rose to 1.548%, up from 1.3% on September 22nd. This is lower than May 19th’s reading of 1.68%, but nonetheless a sign that markets have started to incorporate higher inflation readings and messages that stimulus could be reduced as early as November.
China remained the focus of media attention last week, partly due to the continuing Evergrande saga, which we have discussed in previous Weekly Briefs. However, the Evergrande saga was not the beginning of China’s economic issues. Recent weakness in Chinese equities can be explained by a much longer list of problems going back to regulatory crackdowns, the rising price of raw materials, supply chain bottlenecks, the spread of the Delta variant, and more. How have these various issues affected the Chinese economy? The data is just bearish enough to make Chinese equities appear somewhat less appealing, but no worse than that. The Official Manufacturing PMI Survey of Sentiment Among Factory Owners fell to 49.6 in September, just below the crucial level of 50 (which indicates expansion), from 50.1 in August. Meanwhile, China’s Official Non-Manufacturing PMI, which measures morale in the services and construction sectors, rose to 53.2 in September. All in all, the mixed data coming out of China looks better than the recent spate of negative headlines. It is also important to remember that the country’s saving rate is significantly higher than most of its peers (the global average is about 20%, whereas China’s is 46%). This implies that there is plenty of room for the government to act and avert a crisis if the need emerges.
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