US-China Policies Will Shift in 2022

Hey There Income Hunters,


It has been a wild year for relative market moves between the US and China.


But you would never know that by looking at the dollar/yuan currency cross. 


The dollar is actually DOWN 2.5% versus the yuan, while it is up 8% versus a basket of mostly euro and yen. 



The dynamics will change as we head into 2022.


That means now is a good time to position yourself at advantageous spreads to capitalize on the shifts in policy. 


Today, I’ll share the data and a trade idea so you can consider this low risk/high reward opportunity.

Get Ready: China Tech Will Outperform US Tech in First Half of 2022

As you’ll see in the graph below, US tech crushed China tech in 2021 … 

While China cracked down on regulations and deployed a hawkish monetary policy, the US and other central banks around the world were providing historic stimulus. 

Now, because tech valuations include interest rates, monetary policy has a direct impact on the tech sector. 

Here is the KraneShares China internet ETF (Ticker: KWEB)/Invesco QQQ Trust (Ticker: QQQ)

This will change in 2022 as the US Fed will taper QE purchases and possibly raise rates mid-year. The bond market has priced in two .25% rate hikes in 2022.

The higher rates have had a negative impact on US tech overall, as new 52 week lows have deepend. These negative internals are a critical signpost heading into 2022.

Inflation may peak in Q1 2022 on a year-over-year comparison as the levels from last year catch up with the current CPI spikes. 

That doesn’t change the level of absolute inflation, though. With the Fed stimulus, diminishing equities are expected to correct significantly. 

You can see from the chart below, new 52-week lows paint a very fragile internal condition of the market. 

 

 

 


KWEB/QQQ Ratio


From a macro level, I really like this trade. In the short-run, volatility can move the spread around, but the longer-term outcome is clear based on the position of the central banks. 


This week Jerome Powell clarified the Fed’s position on inflation: J-Pow finally admitted transitory inflation was an incorrect diagnosis by the Fed. 


Now, the Fed can only continue to print money based on an external shock like a market meltdown. That is what I think they will get in the months ahead.


Meanwhile the Peoples Bank of China will start adding stimulus as the country hosts the Winter Olympics and they will want the economy to be humming.


The graph below illustrates how cheap KWEB has become this year relative to QQQ. 



This graph shows KWEB is approaching a ratio of 10%. Now, if it simply recaptures the 40% ratio from 2018,  you would make 300% on the trade. 


Bring It Home


Market flows have become dominated by global macro forces and government policy.


If you get the policy right you can make easy money.


China is the world’s second largest economy behind the US and it has a lot more room to print money right now than the US, Europe and the UK who, since Covid, have all gone pedal-to-the-metal on stimulus. 


Now, the three are all handcuffed because of inflation. This sets up a shift in money flow into China and out of the US, UK and Europe in 2022.


I think we will see a 10% rise in KWEB and a 5-10% decline in QQQ in Q1 2022. I will be searching for the most efficient way to play this paired trade and will report back, until then …


Live and Tradade With passion My Friends,


Griff

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