China tests support while India strengthens

Shanghai’s Composite Index is testing support at 3100. Twiggs Money Flow recovered above zero but buying pressure remains weak. Breach of 3100 would warn of a primary down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Hong Kong is faring better, with the Hang Seng index recovering above 24000 to signal a fresh advance.

Hang Seng Index

India’s Sensex is testing major resistance at 30000. Rising Twiggs Money Flow indicates medium-term buying pressure. Breakout is likely and would offer a target of 32000*.

Sensex Index

* Target medium-term: 29000 + ( 29000 – 26000 ) = 32000

Weak Dollar strengthens gold outlook

The Dollar Index broke support at 100 despite strengthening interest rates, warning of a down-trend. Target for a decline would be the May 2016 low of 93.

Dollar Index

China has burned through a trillion dollars of foreign reserves in the last 3 years, attempting to support the yuan. I believe the sell-off is unlikely to abate and plays a major part in the Dollar’s weakness.

China: Foreign Reserves

A falling Dollar would strengthen demand for gold. Spot Gold is retracing from resistance at $1300/ounce and is likely to find support at $1240/$1250. Respect of support would suggest another advance; confirmed if gold breaks $1300.

Spot Gold

Spot Silver displays a more bearish medium-term outlook, however, with a stronger correction testing support at $17.00/ounce. Breach of support would test the primary level at $15.65 and warn of further gold weakness.

Spot Silver

China dips while India strengthens

Shanghai’s Composite Index is experiencing selling pressure, with Twiggs Money Flow crossing below zero for the first time since 2014. Reversal below 3100 would warn of a primary down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

India’s Sensex is consolidating in a bullish narrow band below major resistance at 30000. Rising Twiggs Money Flow indicates medium-term buying pressure. Breakout is likely and would offer a target of 32000*.

Sensex Index

* Target medium-term: 29000 + ( 29000 – 26000 ) = 32000

Is the Donald long gold?

Don’t know if he is long, but Donald Trump is doing his best to drive up demand for gold.

From the FT overnight:

Donald Trump has warned that the US will take unilateral action to eliminate the nuclear threat from North Korea unless China increases pressure on the regime in Pyongyang.

In an interview with the Financial Times, the US president said he would discuss the growing threat from Kim Jong Un’s nuclear programme with Xi Jinping when he hosts the Chinese president at his Florida resort this week, in their first meeting. “China has great influence over North Korea. And China will either decide to help us with North Korea, or they won’t,” Mr Trump said in the Oval Office.

“If they do, that will be very good for China, and if they don’t, it won’t be good for anyone.”

But he made clear that he would deal with North Korea with or without China’s help. Asked if he would consider a “grand bargain” — where China pressures Pyongyang in exchange for a guarantee that the US would later remove troops from the Korean peninsula — Mr Trump said:

“Well if China is not going to solve North Korea, we will. That is all I am telling you.”

Nothing like the threat of nuclear war to drive up the price of portable assets. Not that it would do much good if you are on the receiving end.

Spot Gold broke resistance at $1250 an ounce. Follow-through above $1260 is likely and would signal an advance to $1300.

Spot Gold

Theresa May had a calmer, less belligerent approach: “….encourage China to look at this issue of North Korea and play a more significant role in terms of North Korea … I think that’s where our attention should focus.”

3 Headwinds facing the ASX 200

The ASX 200 broke through stubborn resistance at 5800 but is struggling to reach 6000.

ASX 200

There are three headwinds that make me believe that the index will struggle to break 6000:

Shuttering of the motor industry

The last vehicles will roll off production lines in October this year. A 2016 study by Valadkhani & Smyth estimates the number of direct and indirect job losses at more than 20,000.

Full time job losses from collapse of motor vehicle industry in Australia

But this does not take into account the vacuum left by the loss of scientific, technology and engineering skills and the impact this will have on other industries.

…R&D-intensive manufacturing industries, such as the motor vehicle industry, play an important role in the process of technology diffusion. These findings are consistent with the argument in the Bracks report that R&D is a linchpin of the Australian automotive sector and that there are important knowledge spillovers to other industries.

Collapse of the housing bubble

An oversupply of apartments will lead to falling prices, with heavy discounting already evident in Melbourne as developers attempt to clear units. Bank lending will slow as prices fall and spillover into the broader housing market seems inevitable. Especially when:

  • Current prices are supported by strong immigration flows which are bound to lead to a political backlash if not curtailed;
  • The RBA is low on ammunition; and
  • Australian households are leveraged to the eyeballs — the highest level of Debt to Disposable Income of any OECD nation.

Debt to Disposable Income

Falling demand for iron ore & coal

China is headed for a contraction, with a sharp down-turn in growth of M1 money supply warning of tighter liquidity. Falling housing prices and record iron ore inventory levels are both likely to drive iron ore and coal prices lower.

China M1 Money Supply Growth

Australia has survived the last decade on Mr Micawber style economic management, with something always turning up at just the right moment — like the massive 2009-2010 stimulus on the chart above — to rescue the economy from disaster. But sooner or later our luck will run out. As any trader will tell you: Hope isn’t a strategy.

“I have no doubt I shall, please Heaven, begin to be more beforehand with the world, and to live in a perfectly new manner, if — if, in short, anything turns up.”

~ Wilkins Micawber from David Copperfield by Charles Dickens

The Chip on China’s Shoulder | WSJ

…..Fully 70% of Chinese television dramas have plots related to war with Japan, he tells us, and in 2012 alone 700 million imaginary Japanese were killed in Chinese movies. Mr. French’s findings on this count are ominous: “Up until the present day,” he writes, “East Asia has never proven large enough for two great powers to coexist peacefully.”

….he points to the enormous demographic shift under way in China as the population ages and birthrates fall far short of replacement. China is on course to have more than 329 million people over the age of 65 by 2050, while the younger, working-age population is set to plummet. The inexorable aging of the population will, Mr. French predicts, restrain the country’s ability to project power in the future. It will halve the size of the military-age population while saddling workers and the government with enormous expenses to care for the elderly. He suggests that the incredible pace with which China is currently trying to assert control over the South China Sea is driven by President Xi Jinping’s awareness that the country has a window of at most 20 or 30 years before demographics catch up to it and such an expansion becomes impossible.

China’s attempt to dominate East Asia (if not Asia) brings it into direct conflict with Japan. Expect increased militarization of Japan as China attempts to expand its sphere of influence. The Korean peninsula and Vietnam are simply sideshows.

Source: The Chip on China’s Shoulder – WSJ

Don’t Believe the Hype: China’s North Korea Policy is All Smoke and Mirrors

Dr. Van Jackson is an Associate Professor at the Asia-Pacific Center for Security Studies, and author of the book Rival Reputations: Coercion and Credibility in US-North Korea Relations:

Social media is abuzz with news that China’s Ministry of Commerce announced it will suspend coal imports from North Korea as part of U.N. Security Council sanctions enforcement for the North’s most recent nuclear and ballistic missile tests in violation of prior Security Council resolutions. So China is finally standing arm-in-arm with the United States and international community to actually do something about North Korea. That’s great, right? Wrong.

China’s suspension of coal imports is smoke and mirrors; an act of geopolitical misdirection. The United States is being played, as it has in the numerous past instances when China supported sanctions resolutions against North Korea at the United Nations only to fail to implement them….

….China’s “emotions” toward North Korea don’t drive its policy. China has a long tradition of paying lip service toward cooperation with the United States and the international community while largely failing to apply any meaningful pressure on North Korea, and for good reason: It doesn’t want a nuclear-armed neighbor on its border to become a nuclear-armed enemy. We ignore China’s enduring strategic interests in North Korea at our peril.

Source: Don’t Believe the Hype: China’s North Korea Policy is All Smoke and Mirrors

The Catch-22 in U.S.-Chinese Relations | Carnegie-Tsinghua Center

Paul Haenle served as the director for China, Taiwan, and Mongolian Affairs on the National Security Council staffs of former presidents George W. Bush and Barack Obama prior to joining Carnegie:

When, at the no-necktie summit in California in 2013, Xi [Chinese President Xi Jinping] put forward the [strategic partnership] concept, he mentioned three foundational principles: no conflict and no confrontation; mutual respect, including for both countries’ core interests and major concerns; and win-win cooperation. The United States has long reiterated that the relationship should be based not on slogans but on the quality of the cooperation.

….But China’s call for respect for core interests has been a showstopper in Washington, seen as an indication that what China really seeks is U.S. concessions on areas of long-standing disagreement between the two countries.

Historically China has defined its core interests as including Taiwan, Tibet, and Xinjiang (the Uyghur Autonomous Region) but these have lately expanded to include the South China Sea (9-dash line) and Diaoyu (Senkaku) islands administered by Japan.

Vladimir Lenin advocated: “Probe with a bayonet. If you meet steel, stop. If you meet mush, then push.”

Any attempt at conciliation would encourage further expansion.

Source: The Catch-22 in U.S.-Chinese Relations – Carnegie-Tsinghua Center – Carnegie Endowment for International Peace

Australian miners and the PBOC

I mentioned on Friday that the ASX 300 Metals & Mining Index is falling, with declining Twiggs Money Flow warning of long-term selling pressure.

ASX 300 Metals & Mining

The reason is not hard to find. China’s PBOC is tightening monetary policy to force a slow-down in real estate and construction. Money supply (M1) growth contracted over the last 6 months, with a sharp drop in January 2017.

ASX 300 Metals & Mining

Bulk commodity prices are expected to ease.

Can Australia dodge the great deleveraging? | MacroBusiness

Interesting chart from UBS (via Macrobusiness). Movement between 2002 and 2016 for a number of Developed and Emerging Market (DM and EM) countries in the ratio of bank credit to GDP and bank debt to credit.

The good guys are in the top left corner and the bad guys bottom right.

Australia and China are testing record levels of bank credit to GDP, tracing a similar path to Spain. We all know how that ended.

Source: Can Australia dodge the great deleveraging? – MacroBusiness

Chinese real estate bubble “slows”

Elliot Clarke at Westpac reports that home price growth in tier-1 cities “slowed materially” in January 2017:

From 29%yr in September 2016, tier-1 new home price growth has slowed to 23%yr. Similarly for the tier-1 secondary market, price momentum has slowed from 33%yr to 26%yr since September.

Tier-2 and tier-3 cities have far lower annual growth rates: 12% and 9% respectively for new homes and 9% and 6% for existing dwellings.

When we compare tier-1 price growth to Sydney and Melbourne, the Chinese bubble is in a different league. From CoreLogic: “Sydney home prices surged 15.5 per cent and Melbourne’s 13.7 per cent over the year [2016]”.

It is hard to imagine a soft landing when property prices have been growing at 30% a year.

Even 15%….

China: Inflation on the rise

China’s Shanghai Composite Index is approaching resistance at 3300 after respecting its new support level at 3100. Twiggs Money Flow troughs above zero indicate long-term buying pressure. Breakout would provide further confirmation of the primary up-trend.

Shanghai Composite Index

* Target medium-term: 3100 + ( 3100 – 2800 ) = 3400

The rising market is primarily a result of central bank stimulus so investors need to consider the result if this is withdrawn. Rising producer prices warn that underlying inflation is growing. If this continues the PBOC will be forced to retreat.

China: Producer Prices Annual Change

Hong Kong’s Hang Seng Index is also testing resistance, at 24000. A Twiggs Money Flow trough that respects zero would signal long-term buying pressure but that looks uncertain at present.
Hang Seng Index

Gold breaks through $1250

10-Year Treasury Yields are testing support at 2.30%. Expect this to hold. Breach of the rising trendline would warn of a correction but this seems unlikely with the Fed intent on normalizing interest rates. Breakout above 2.50% would offer a target of 3.0%.

10-Year Treasury Yields

The Dollar Index rally remains muted since finding support at 100. Rising long-term yields would fuel the advance, with bearish consequences for gold.

Dollar Index

China’s Yuan is consolidating. Resistance on USDCNY at 7 Yuan is likely to be tested soon.

USDCNY

The PBOC has been burning through its foreign reserves to slow the rate of depreciation against the Dollar, to create a soft landing. A sharp fall would destabilize global financial markets and fuel capital flight from China.

China Foreign Reserves

Spot Gold broke through resistance at $1250, signaling an advance to $1300.

Spot Gold

How to survive the next four years

Donald Trump

We are entering a time of uncertainty.

Donald Trump started his presidency with a continuation of the confrontational approach that he exhibited throughout his campaign, with scant regard to unifying the country and governing from the middle. Instead he has signed off on two controversial oil pipelines that, while they would create jobs, have met fierce opposition and are likely to polarize the nation even further.

Subtlety is not Trump’s strong point. Expect a far more abrasive style than the Obama years.

Trump also signed off on constructing a wall along the border with Mexico. Again, this will create jobs and slow illegal immigration — two of his key campaign promises — while harming relations with the Southern neighbor.

Another key target is the trade deficit. The US has not run a trade surplus since 1975. Expect major revision of current trade agreements like NAFTA, which could further damage relations with Mexico, and a slew of actions against trading partners such as China and Japan who have used their foreign reserves in the past to maintain a trade surplus with the US. Floating exchange rates are meant to balance the flow of imports and exports on current account, minimizing trade surpluses/deficits over time. But this can be subverted by accumulating excessive foreign reserves to suppress appreciation of your home currency. Retaliation to US punitive actions is likely and could harm international trade if not carefully managed.

Apart from wars, Trump and chief strategist Steve Bannon also seem intent on provoking a war with the media, baiting the press in a recent New York Times interview:

Bannon delivered a broadside at the press…. saying, “The media should be embarrassed and humiliated and keep its mouth shut and just listen for a while.” Bannon also said, “I want you to quote me on this. The media here is the opposition party. They don’t understand this country. They still do not understand why Donald Trump is the president of the United States…..”

Trump and Bannon’s strategy may be to provoke retaliation by the media. One-sided reporting would discredit the press as an objective source of criticism of the new presidency.

On top of the Trump turmoil in the US, we have Brexit which threatens to disrupt trade between the UK and European Union. If not managed carefully, this could lead to copycat actions from other EU member states.

Increasingly aggressive steps by China and Russia are another destabilizing factor — with the two nations asserting their global power against weaker neighbors. Iran is another offender, attempting to establish a crescent of influence in the Middle East against fierce opposition by Saudi Arabia, Turkey and their Sunni partners. Also, North Korea is expanding its nuclear arsenal.

We live in dangerous times.

But these may also be times of opportunity. Trump has made some solid appointments to his team who could exert a positive influence on the global outlook. And confrontation may resolve some long-festering sores on both the economic and geo-political fronts.

How are we to know? Where can we get an unbiased view of economic prospects if confrontation is high, uncertainty a given — the new President issuing random tweets in the night as the mood takes him — and a distracted media?

There are two reliable sources of information: prices and earnings. Stock prices reflect market sentiment, the waves of human emotion that dominate short- and medium-term market behavior. And earnings will either confirm or refute market sentiment in the longer term.

As Benjamin Graham wrote:

“In the short term the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”.

In the short-term, stock prices may deviate from true value as future earnings and growth prospects are often unclear. But prices will adjust closer to true value as more information becomes available and views of earnings and prospects narrow over time.

We are bound to experience periods of intense volatility over the next four years as hopes and fears rise and fall. These periods represent both a threat and an opportunity. A threat if you have invested on hopes and expectations rather than on solid performance. And an opportunity if intense volatility causes prices to fall below true value.

It will pay to keep a close watch on technical signals on the major indexes. As well as earnings growth in relation to index performance.

Also, keep a close eye on long-term indicators of market risk such as the Treasury yield curve and corporate bond spreads. These often forewarn of coming reactions and will be reviewed on a regular basis in future newsletters.

Best time to short commodities since 2012

From Vesna Poljak:

….China’s stimulus is finite and demand for raw materials will collapse without it.

Australian Atul Lele, the Bahamas-based chief investment officer of private wealth manager Deltec, says all monetary and fiscal stimulus has a natural conclusion – “it just ends” – and traditional indicators of commodity prices such as global growth and liquidity conditions have been outrun by prices already.

“Right now, commodity prices are consistent with 8 per cent global industrial production. If we saw that, ex of the financial crisis recovery, it would be the strongest rate of global industrial production growth since 1981, at least. Now I’m bullish global growth and more bullish than most people, but it’s not going to happen and even if it does happen, all you’ve done is justify current commodity prices. So why would you buy a resource stock now?”

China continues to inject stimulus to revive its economy but that is making its financial system increasingly unstable. Credit growth in excess of 30% of annual GDP warns of a banking crisis according to the BIS. And shrinking foreign reserves flag that the currency is under pressure.

China faces the impossible trinity. According to David Llewellyn-Smith at Macrobusiness, a country pegged to the Dollar can only achieve two out of the following three:

  • a stable exchange rate
  • independent monetary policy
  • free and open international capital flows

At present all three are under pressure.

Source: Best time to short commodities since 2012 says Deltec’s Atul Lele

China’s Day of Reckoning | The Market Oracle

From Michael Pento:

Therein lies China’s dilemma: Allow the yuan to intractably fall, which will increase capital flight and destroy its asset-bubble economy. Or, raise interest rates to stabilize the currency and risk collapsing asset bubbles that will crumble under the weight of rising debt carrying costs.

China embodies a Keynesian dystopia that results from central planning gone mad. It’s mirage of prosperity should soon be coming to an unpleasant end. The misguided belief any government can print unlimited amounts of money and issue a massive amount of new credit; while providing the conditions that are the antitheses necessary for viable growth, has one significant Achilles heel: eventually, it will destroy your currency. Currency is always the pressure valve that explodes in an economy that has reached the apogee of dysfunction. The Red nation isn’t the only offender on this front, but is certainly one of the worst. Therefore, China and the yuan may have finally run out of time.

Source: Chinese Yuan’s Day of Reckoning :: The Market Oracle ::

Will China’s Financial Bust Ever Come?

From Paul Panckhurst and Adrian Leung at Bloomberg:

China’s reading is the nation’s highest on record in the gauge released by the Bank for International Settlements. It’s the single most reliable indicator of looming financial crises, according to the BIS, which found in a 2011 analysis of 36 countries that a majority of banking crises followed readings higher than 10 percent.

The credit-to-gross domestic product “gap” focuses on the amount of credit provided to households and businesses as a share of gross domestic product. It shows when the ratio of credit to GDP is blowing out – suggesting a credit boom and the risk of trouble brewing.

It isn’t advisable to place total reliance on a single indicator, but the rate of credit growth in China is alarming — and unsustainable in the long-term.

Source: Will China’s Financial Bust Ever Come?

Asia: Japan surges while China ebbs

Japan is surging ahead, with the Nikkei 225 index headed for a test of 20000* after its breakout above 17500 four weeks ago.

Nikkei 225 Index

* Target medium-term: 17500 + ( 17500 – 15000 ) = 20000

India’s Sensex found support at 26000, but narrow consolidation and declining Twiggs Money Flow both warn of selling pressure. Breach of 26000 would indicate another decline, with a target of 23000*.

Sensex Index

* Target medium-term: 26000 – ( 29000 – 26000 ) = 23000

Shanghai Composite Index is undergoing another correction. Respect of support at 3100 would indicate a healthy up-trend, while breach of 3000 would warn of a reversal. Declining Twiggs Money Flow indicates medium-term selling pressure.

Shanghai Composite Index

* Target medium-term: 3100 + ( 3100 – 2800 ) = 3400

Sharply falling Money Flow warns of strong selling pressure on Hong Kong’s Hang Seng Index. Breach of support at 22000 would signal a primary down-trend with an initial decline to 20000.

Hang Seng Index