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Jared Woodard: FXI Looking to China

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On Wednesday, the Chinese Flash Purchasing Managers' Index will be released, and people are watching this data point closely for confirmation of whether the recent turn in sentiment is justified. For an example of the latter, here is the chairman of Goldman Sachs Asset Management, Jim O'Neill:

"So, let's reflect a little. Chinese GDP growth for 2012 will probably come in now at 7.7% to 7.8%, just above Premier Wen's 7.5%. After 9.2% growth in 2011, the first two years of the decade are averaging 8.5%. We have assumed 7.1% growth for the decade. This currently seems very doable. Moreover, China has slowed to this pace from its previous three-decade average of 10.25%. With a trade surplus a quarter below its peak, stabilized housing prices, consumption rising as a share of GDP, and inflation below target, the situation looks good."

His letter was widely read over the weekend and it cites all of the major economic releases showing an improvement in China. O'Neill is not alone, either: analysts at several major banks and buy-side firms are out with reports arguing that government stimulus efforts are starting to show up in the broader economy.

fig. 1. Chinese Flash PMI, 2008-2012
Source: HSBC



fig. 2. Change in 1M Implied Volatility for VIX and VXFXI, 2012
Source: Condor Options

 

If that's true, then we should see an improvement in the PMI report on Wednesday. There's no doubt that the hard landing scenario that had been weighing on Chinese equities has been lifted: iShares FTSE/Xinhua China 25 Index (FXI) is up almost 20% from its low earlier this summer, and Chinese stocks have been rallying hard in recent weeks even while the U.S. market stalls out.

FXI implied volatility has also not fallen as far or as fast since early June as has option prices for the S&P 500 (fig. 2). That presents a good opportunity for short volatility exposure should the economic data come in stronger.

At the same time, our momentum-based VIX signal has us avoiding new short vol and long stock positions for the moment, so we will wait until the signal clears to execute on this idea.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.

Jared can be followed on Twitter at twitter.com/CondorOptions.



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