Macau

Well that was a wild start to the new year. Chinese indexes have collapsed over 7% in two days. The fact that there was no bounce today in the Shanghai Composite Index betrays serious market weakness. Nevertheless, we’ve seen last year that Macau stocks and mainland Chinese stocks are not necessarily correlated. China can crash and Macau stocks can trade independently for the short term. We saw this yesterday as Melco, Las Vegas Sands, and Wynn were only slightly down. Galaxy Entertainment was actually up.

This should not be misconstrued as showing complete independence between wider Chinese capital markets and Macau. Longer term, the lower Chinese shares go (and they have a long way down to go) the worse off Macau casinos will be. It is likely that much of the liquidity gamblers use in Macau is from stock market wealth, especially for the remaining VIPs who still manage to get money through, and this liquidity source is evaporating.

A bird’s eye view shows that Macau has two opposing forces influencing it that could pull it in either direction, theoretically. The ongoing “corruption crackdown” is the immediate catalyst of the fall since March 2014. If there is any sign that capital flow regulations are being liberalized by Beijing, then all Macau stocks will move much higher very quickly. But despite vague rumors of Beijing easing up on Macau since October, there is really nothing doing in that department.