The Blame Game, China GDP next

If you don't know what's happening – blame China. If that doesn't work, blame the Fed. The overwhelming majority of market watchers are pointing the finger at one of those two, but what if they're wrong. Premium Insights subscribers look out for a new trade due ahead of the China's barrage of economic data due at 02:00 GMT/London.

The Blame Game

If you don't know what's happening – blame China. If that doesn't work, blame the Fed. The overwhelming majority of market watchers are pointing the finger at one of those two, but what if they're wrong.

Markets were relatively quiet to start the week as the US observed a holiday. A modest rebound in risk assets was mostly snuffed out late in the day with the commodity currencies and cable sliding once again. Some of the GBP selling came after the BOE's Vlieghe urged patience before raising rates and then entertained the idea of a cut.

In the bigger picture, markets remain confused and there is no sense that the turmoil will abruptly end. Here are some questions about the popular ideas about what's driving the market:

Yuan weakness

Early in the year, the blame for market turmoil was placed on the yuan but it's risen now risen for 7 straight days and is unchanged on the year. Ashraf explained all the mechanics of CNY vs CNH dynamics and their implications on risk appetite, currencies, commodities and equity indices in a special 19-minute video on Jan 12 titled "Special Chinese Yuan Video".

China's economy

There has been nothing alarming or abrupt from the Chinese economy. The questions today are the same ones we've heard for the past 3 years. We will get a better sense of growth when GDP numbers are released today at 0200 GMT (Q4 consensus is +6.8%) but the data is unreliable. Dec retail sales and industrial production are also due at the same time.

Chinese stocks

China's stock market is the laggard and was the first to tip. But remember that the PE in Chinese stocks is 57. By many measures it was severely overvalued and buying via official avenues may have skewed the market and the latest fall could be more correlation than causation. What may be hurting sentiment more than the data is the recent haphazard and changeable approach to policymaking, including official stock buying.

The Fed

We believe that the Fed is wrong about coming inflation and growth and that rate hikes are a mistake. The wrong-footedness is hurting sentiment but it doesn't account for the rout in markets.

What's Left Out

Commodities. The common thinking is that this is a demand-side decline and commodities are reacting. But what if it's a matter of oversupply? As prices fall in commodity exporters, it hurts those economies and demand suffers as a result. Meanwhile, there are worries about severely overleveraged commodity companies in the bond market.

This approach is largely left out of the discussion but it helps to connect the dots better than other approaches.