China markets look like they need another holiday

By Wayne Cole

(Reuters) – A look at the day ahead in European and global markets from Wayne Cole.

High hopes China’s markets would return from the break with a spring in their step have yet to be met, with modest gains for stocks so far.

Tourism revenues during the Lunar New Year holiday did surge by 47% on a year earlier as more than 61 million rail trips were taken, though the comparison was flattered by a particularly weak season last year.

The country’s central bank skipped a chance to cut rates again on Sunday, which will likely limit downward pressure on the yuan, but with deflation looming, analysts see plenty of scope for further policy stimulus.

China’s blue chip index added another 0.5% on top of its 6% pre-LNY rally. Yet that is still down 1% this year and 43% from the highs hit in 2021.

In contrast, Japan’s Nikkei is up almost 15% for the year so far and paused just short of the all-time peaks hit back in 1989.

Even after its surge the Nikkei is still only capitalised at 683 trillion yen ($4.55 trillion), about the same as Nvidia and Apple combined, and far below the S&P 500’s $42 trillion.

The Nikkei’s market cap is also not much more than the total cash held by Japanese companies, many of which trade at a discount to book value.

Speaking of Nvidia, the AI diva’s results this week will be a test of its sky high valuations and a price to earnings ratio of no less than 96.

The chipmaker’s $570 billion increase in market cap this year accounts for more than a quarter of the S&P 500’s gains, so any disappointment would be a black eye for the whole index.

Options imply a risk the shares could swing 11%, or $200 billion, in either direction on the results.

Then again Nvidia does have a very fat net profit margin of 42% and, as of October, a cash pile of $18 billion, so it can easily weather the vagaries of one result.

It is also riding the most powerful force in markets – momentum. Why is it going up? Because people are buying it. Why are people buying it? Because…