(Bloomberg) -- Options markets show increased bets on Chinese stocks outperforming U.S. ones as the Federal Reserve prepares policy tightening while speculation increases that Beijing may ease.
Activity in contracts on the iShares MSCI Emerging Markets ETF (EEM), iShares China Large-Cap ETF (FXI) and KraneShares CSI China Internet Fund (KWEB) shows increasing optimism. At the same time, measures of volatility on U.S. stocks display nerves. On Tuesday, calls on KWEB were most expensive relative to puts in seven weeks, showing greater bets on upside. Meanwhile, the Cboe Volatility Index or VIX closed above 20 for the first time in three weeks on Thursday.
“The ‘end-of-U.S.-exceptionalism' trade suddenly picked up pace” on Wednesday, said Charlie McElligott, a cross-asset strategist at Nomura Securities, in a note. He cites upside bets on EEM and FXI, and buying in KWEB. There are more clients talking about a Chinese pivot toward easing “both with credit impulse as well as potential to cut” over the course of 2022.
Markets have been laser-focused on comments from Fed officials about the timing and pace of rate hikes as consumer prices rising 7% last year have seen them pivot sharply toward combating the highest inflation since 1982. Some investors worry that the policy response could disrupt the risk-on mood that's largely prevailed since markets hit bottom in March 2020. At the same time, Chinese officials have signaled that they may ease policy to support the economy as they pursue their “Covid zero” strategy.
“We have been highlighting bullish flow in China recently, and that continued” on Wednesday and Thursday with buying in calls on KWEB and FXI, Susquehanna derivatives strategist Chris Murphy wrote in a note. “The argument for China to outperform is ‘the U.S. turning increasingly hawkish while Beijing becomes dovish' is gaining a lot of traction.”
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