Hey There Income Hunter,

 

Supply chain breakdowns in Shanghai due to the lockdowns are an issue for global growth since Shanghai accounts for 15-20% of China’s GDP

 

Plus suppliers to Apple and Tesla located there …

 

The CEO of JD.com Inc. (Ticker: JD) had this to say about the situation:

 

“Our operation is under huge pressure, last night we had millions of orders from Shanghai, but we still need to access our locked warehouses, get green passes for our vans, [and collaborate with] local communities”

 

This global macro force has massive implications for growth, and inflation and could also force changes in central policies …

 

Today I’ll share data that provides insight into their impact on the markets and specific stocks.

 

Tourism Collapse

 

The Tomb holiday (April 3-5) in China is one of the most popular and usually drives a lot of tourism trips … However the data shows how drastic a drop the lockdowns have created. 

 

• Total trips (rail, waterway and road) during the three-day Tomb Sweeping holiday were down 63%.
• Tourist trips to Sanya in Hainan (China’s Hawaii) were down 99%

 

Supply Chain Disruptions

 

• Containers full of frozen food and chemicals are piling up at China’s biggest port in Shanghai
• EV maker Xpeng (XPEV) says if Shanghai and supply chain firms cannot resume production, all original equipment managers in China will face a production halt in May
• State Managed Enterprises (SME) layoffs/bankruptcy is the greater risk if COVID-19 cannot be contained as employees cannot get to work

 

Fragile Property Sector 

 

• 29% YoY drop in China new home sales for March
• New projects are postponed and housing sales have stalled
• More defaults come from the building and property sectors with a big bond maturity in July 2022

 

Beijing has announced green, energy-saving coupons for its consumers …. This helps consumers buy large durable home goods …

 

If COVID-19 can be contained, revenge spending may pop up in the second half of 2022 but no one is thinking about that right now – and consumption levels will remain depressed in the near-term.

 

Implications for the Markets

 

China has a massive impact on the price of commodities and global growth. The IMF recently lowered their global GDP number for 2022 from 4.9% to 4.4%.

 

No doubt there are many cross currents of macro flows that can alter the picture, including resolution of the supply chain disruptions plus central bank tightening and geopolitical risks.

 

The earnings season in the US is off to a mixed start, but overall earnings have been a bit of a disappointment – especially when you throw Netflix into the mix. 

 

 

Equity Volatility Is An Outlier

 

I am focused on the massive differences in volatility between bonds and stocks. Bond volatility is at historic extremes above stocks and this is usually resolved with the VIX rising. 

 

 

Look for VIX to Rally into FOMC Again

VIX rallied sharply into the March FOMC meeting as real money accounts hedged their portfolio by buying puts on SPY causing the VIX to rise. 

 

We may or may not see as large a rise in the VIX into May 4, but the 20 level is a good area to hold a bullish VIX position.

 

The probabilities favor a move to the high 20s at a minimum in the weeks ahead. 

 

Bring It Home

 

This week’s option expiration (May 20) for VIX options cleaned out many of the VIX puts, which were most in the 21 puts.

 

The option expiration data is very useful for getting ideas on high probability trades when combined with the macro forces at work.

 

Timing is everything and I’m always looking for the low risk/high reward trades that give you an edge in the market. 

 

This is one of those opportunities and I’ll keep an eye out for confirmation in the days ahead.

 

Have a great day and as always …

 

Live and Trade With Passion My Friend,

Griff