East to West: Asia, Europe weaken but US powers on

Starting with Asia, South Korea’s Seoul Composite Index continues to test support at 2450. Bearish divergence on the Trend Index warns of selling pressure but this appears secondary in nature. Breach of the rising trendline would warn that the primary up-trend is losing momentum.

Seoul Composite Index

Japan’s Nikkei 225 Index is consolidating between 22000 and 23000. A Trend Index trough high above zero indicates strong buying pressure.

Nikkei 225 Index

China’s Shanghai Composite Index is undergoing a correction that should find support at 3200. Bearish divergence on the Trend Index, and a cross below zero for the first time since May 2016, warn of continued selling pressure.

Shanghai Composite Index

India’s NSE Nifty Index continues to test support at 10000 after a weak correction. Twiggs Trend Index respecting zero signals strong buying pressure. Recovery above 10500 is likely and would indicate another primary advance.

Nifty Index

Target 10500 + ( 10500 – 10000 ) = 11000

Europe is weaker despite strong manufacturing signals. Dow Jones Euro Stoxx 50 found support at 3520 but the Trend Index is declining, warning of selling pressure. Breach of 3520 is likely and would warn of a test of primary support at 3400.

DJ Euro Stoxx 50

The Footsie remains volatile, with the index headed for another test of stubborn resistance at 7600. But Trend Index is declining and continues to warn of selling pressure.
FTSE 100

Moving to the US, the S&P 500 continues to shrug off concerns regarding high valuations and a flattening yield curve. The rising Trend Index, high above zero, indicates long-term buying pressure.

S&P 500

The Nasdaq 100 also continues a strong bull market, with the big five tech stocks (Apple, Amazon, Alphabet, Microsoft and Facebook) all recording solid gains.

Nasdaq 100

ASX struggles with resistance

Bulls were baited with a third ASX 200 breakout above resistance at 6000, only to see the index retreat yet again. Declining Money Flow warns of commitment from sellers. Breach of support at 5920 would confirm a correction already signaled by Money Flow (21-day) crossing to below zero.

ASX 200

The ASX 300 Retailing Index is weak, anticipating a poor Christmas.

ASX 300 Retailing

But Food & Staples Retailing is strengthening.

ASX 300 Food & Staples Retailing

ASX 200 direction, however, is largely determined by Banks and Miners.

The bear-trend on iron ore is weak, with the bulk commodity continuing its test of resistance at 70. Respect would warn of another decline, while breakout above 80 would signal a primary up-trend.

Iron Ore

The ASX 300 Metals & Mining Index, however, shows signs of selling pressure, with Money Flow (21-day) declining to zero. Breach of support at 3300 would warn of a correction.

ASX 300 Metals & Mining

Banks continue to disappoint, with the ASX 300 Banks index headed for a test of short-term support at 8250. Twiggs Trend Index peaks below zero indicate continued selling pressure. Breach of 8250 is likely and would warn of a test of primary support between 8000 and 8100.

ASX 300 Banks

ASX still hesitant

The ASX 200 index is running up against resistance at 6000. Reversal below support at 5920 would signal a correction. As would Twiggs Money Flow (21-day) crossing to below zero.

ASX 200

Iron ore is testing resistance at 70. Respect would warn of another (primary) decline. Breakout above 80 would signal a primary up-trend but that is unlikely if China continues to crack down on bank lending.

Iron Ore

The ASX 300 Metals & Mining Index is testing support at 3300. Decline of the Trend Index below zero warns of medium-term selling pressure. Breach of 3300 would warn of a correction.

ASX 300 Metals & Mining

The ASX 300 Banks index found short-term support at 8300. Recovery above 8500 would be a bullish sign but respect is more likely and would warn of a test of primary support between 8000 and 8100.

ASX 300 Banks

East to West: European tremors

Complacency in Europe has been shaken, with Dow Jones Euro Stoxx 600 testing medium-term support at 380. Bearish divergence on the Trend Index, with intervening troughs below zero, warns of strong selling pressure. Breach of 380 is likely and would indicate a test of primary support at 366.

DJ Euro Stoxx 600

The UK’s Footsie broke medium-term support at 7350 and is headed for a test of primary support at 7200. Bearish divergence on the Trend Index again warns of strong selling pressure. Breach of 7200 would signal reversal to a primary down-trend.

FTSE 100

Asia was also affected, with Japan’s Nikkei 225 Index the only major index to end the week on a positive note, after finding solid support at 22000.

Nikkei 225 Index

South Korea’s Seoul Composite Index below 2500 warns of a correction, though nothing more.

Seoul Composite Index

China’s Shanghai Composite Index broke support at 3340 to warn of a correction. Bearish divergence on the Trend Index warns of selling pressure but this appears to be secondary in nature.

Shanghai Composite Index

India’s NSE Nifty Index is still bullish but reversal below 10000 would warn of a strong correction.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

The S&P 500 is as bear-proof as you can get in the current climate, with the trend index reflecting strong buying pressure.

S&P 500

A bear market in Europe may not be sufficient to dent the animal spirits driving US markets but would certainly influence more cautious investors to change to a risk-off stance and shorten the time left for more adventurous souls.

ASX still tentative

The ASX 300 Metals & Mining Index retraced to test support at 3300. Breach is still unlikely but would warn of a correction.

ASX 300 Metals & Mining

Iron ore strengthened to test the declining trendline but respect of resistance at 70 would warn of a continued down-trend. Breakout above 80 would signal reversal to a primary up-trend but that is unlikely if China continues to rein in bank and shadow bank lending.

Iron Ore

The ASX 300 Banks index broke support at 8500 and is expected to test primary support between 8000 and 8100. The sector faces headwinds from slowing development and falling prices, especially in high-density apartments. Recent Trend Index peaks at/below zero warn of long-term selling pressure.

ASX 300 Banks

Banks are the biggest sector in the broad ASX 200 index which retreated below resistance at 6000. Failure of short-term support at 5920 would signal a correction. The ASX 200 exhibits a tentative up-trend but bearish divergence on the Trend Index warns of long-term selling pressure.

ASX 200

Felix Zulauf: China, the Fed and the evolution of markets

East to West: China sell-off

Four markets worth our attention this week:

China’s Shanghai Composite Index displays strong selling pressure, testing medium-term support at 3340. Breach of support is likely and would warn of a strong correction, with an immediate target of 3200.

Shanghai Composite Index

India’s NSE Nifty Index displays strong support at 10000. Recovery above 10500 would signal an advance to 11000.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Dow Jones Euro Stoxx 600 found medium-term support at 380. Bearish divergence on the Trend Index warns of selling pressure. Breach of support at 380 would be a strong bear signal but respect of the rising trendline is more likely and recovery above the recent high would signal a fresh advance.

DJ Euro Stoxx 600

The UK’s Footsie found support at 7350 but bearish divergence on the Trend Index warns of long-term selling pressure. Breakout above 7550 is unlikely at this stage.

FTSE 100

S&P 500 reaches 2600

The S&P 500 reached its medium-term target of 2600. This is stage 3 of a bull market; a short correction or consolidation followed by further gains is likely.

S&P 500

A sharp correction during stage 3 often warns of an impending top but is unlikely at this stage.

Bellwether transport stock Fedex found short-term support after a 3-week correction. Bearish divergence on Twiggs Money Flow so far suggests secondary selling pressure and not an alteration in the primary trend. Recovery above 220 would respect the rising trendline, indicating a healthy up-trend — a bullish sign for the broader economy.

Fedex

Elliot Clarke at Westpac raises concerns over low investment growth:

…the FOMC clearly sought to cement market expectations of a rate hike in December in their October/November meeting minutes. The economy was seen as continuing to enjoy above-trend growth thanks to robust gains for household consumption. Built on income gains as well as strong confidence, this trend is expected to persist. Inevitably though, an economy cannot be built on consumption alone. Investment is necessary, and this is an area of the growth outlook where we harbor doubts. Should, as we expect, investment growth remain tepid, then productivity and income growth will be held back. This is a key reason why we believe that this rate hike cycle is likely to top out around 1.875%, after the December decision and two further hikes in 2018.

I think he is right that the Fed will remain cautious about raising interest rates until investment growth strengthens. Low inflation is partly caused by low investment, but this is likely to fade as new job creation strengthens.

ASX 200 faces resistance at 6000

The ASX 200 faces resistance at the key 6000 level. Money Flow is forming troughs above zero, indicating buying pressure. Recovery above 6000 would signal another advance. Failure of support at 5900 is less likely but would warn of a strong correction.

ASX 200

Iron ore prices are strengthening and likely to test the descending trendline at 70. Breakout above 80 would signal reversal to a primary up-trend but that still seems a long way off.

Iron Ore

Miners responded with another rally, the ASX 300 Metals & Mining Index respecting support at 3300.

ASX 300 Metals & Mining

So why the hesitancy? Banks are the largest sector in the ASX 200, with Financials representing 37.2% of the broad index. The ASX 300 Banks index is retreating and expected to test the band of support between 8000 and 8100. Trend Index peaks below zero warn of long-term selling pressure.

ASX 300 Banks

The outlook for banks is not that rosy. Household debt is growing faster than disposable incomes, placing finances in an increasingly precarious position. Interest payments are still manageable at 8% of disposable income but that could change if interest rates rise.

Australia: Household Debt/Disposable Income

The housing cycle appears to have peaked, with growth now falling. A function of tighter controls by APRA over investor lending and a Chinese crackdown on capital outflows.

Australia: House Prices

Building approvals for detached houses remain steady but approvals for higher-density housing are falling.

Australia: Building Approvals

A boom in construction of high-density housing has provided a strong tailwind to the economy over recent years, illustrated by the sharp spike in total residential construction compared to new houses in the chart below.

Australia: Value of Work Done

But the downturn in apartment prices and falling building approvals is likely to turn that tailwind into a headwind as apartment construction falls. This would affect not only the construction sector but the entire economy.

Political uncertainty over the continuation of favorable tax treatment for housing investors could also impact on new housing investment and strengthen the headwinds facing the economy.

East to West: Still mostly bullish apart from EU & China

South Korea’s Seoul Composite Index continues in a strong up-trend despite the nuclear threat from its northern neighbor. The latest retracement appears mild and likely to test the rising trendline around 2450.

Seoul Composite Index

Japan’s Nikkei 225 Index also retraced but the long tail on this week’s candle indicates solid support at 22000.

Nikkei 225 Index

Hong Kong’s Hang Seng continues in a strong bull trend, with the Trend Index respecting the zero line.

Shanghai Composite Index

China’s Shanghai Composite Index is consolidating above support at 3340. Bearish divergence on the Trend Index warns of selling pressure but this appears to be secondary in nature, warning of no more than a correction.

Shanghai Composite Index

India’s NSE Nifty Index is also in a bull trend, with the Trend Index respecting zero. Respect of the rising trendline is likely and would signal a fresh advance.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Dow Jones Euro Stoxx 600 shows a stronger correction, with bearish divergence on the Trend Index warning of selling pressure.

DJ Euro Stoxx 600

The UK’s Footsie displays a stronger bearish divergence and the index is likely to test primary support at 7200.

FTSE 100

The S&P 500 displays a strong bull trend but penetration of the rising trendline is likely to lead to a correction to 2500.

S&P 500

ASX 200 tests support at 5900

Australia is headed for a period of political uncertainty, while tighter Chinese monetary policy and a crackdown on capital outflows will slow the local real estate boom. Employment is strong but low wage growth suggests under-employment.

Wage Index

Reliance on mining and real estate as the backbone of the economy is bound to disappoint. What the economy needs is a vibrant manufacturing and tech sector but this is shrinking rather than growing, with investment in machinery and equipment falling from 8% to almost 4% of GDP over the last decade.

Wage Index

Stocks are rising but we need to temper our enthusiasm with a hint of caution. The ASX 200 is testing medium-term support at 5900. The tall shadow on Friday’s candle indicates continued selling pressure. Breach of 5900 would warn of a strong correction to test primary support at 5650, while respect (indicated by recovery above 6000) would confirm an advance to 6250 (5950 + 300).

ASX 200

* Target calculation: 5950 + ( 5950 – 5650 ) = 6250

I remain wary of the banks because of their low capital base and high mortgage exposure. Reversal below the medium-term trendline warns of a correction to test the band of primary support between 8000 and 8100. Recovery above 8800 is less likely.

ASX 300 Banks

Miners are more bullish despite the low iron ore price. The ASX 300 Metals & Mining index is testing medium-term support at 3300. Respect is likely and would signal another advance.

ASX 300 Metals and Mining

Falling Aussie Dollar boosts Gold stocks

The Aussie Dollar is tanking, falling from a September high of 81 US cents to below 76 US cents. Test of support at 73.50 is likely.

Australian Dollar AUDUSD

The All Ords Gold Index ($XGD) responded to the weakening Aussie Dollar, despite a lackluster performance from gold. Breakout above 5000 would signal a new primary advance, offering a target of 5650*.

All Ords Gold Index ($XGD)

* Target calculation: 5000 + ( 5000 – 4350 ) = 5650

ASX 200 confirms breakout

The ASX 200 closed above its 2015 high of 6000, confirming an earlier breakout by the All Ords. The immediate target for an advance is 6250 (5950 + 300) but the long-term target is the 2007 high of 6800.

ASX 200

I remain wary of the banks, with the ASX 300 Banks index facing resistance at 8800. Reversal below the medium-term trendline at 8600 would warn of another test of primary support (8000). Recovery above 8800 is as likely. I remain concerned over their low capital base and high mortgage exposure.

ASX 300 Banks

Miners are more bullish despite the falling iron ore price. The ASX 300 Metals & Mining index reached its target of 3500 but is now retracing to test the new support level. Respect would signal another advance.

ASX 300 Metals and Mining

Australia seems headed for a period of political instability, while tighter Chinese monetary policy and a crackdown on capital outflows could also impact on the Australian economy. There is a lot that could go wrong but the market is taking this in its stride. Just temper your optimism with a measure of caution.

East to West: S&P 500 leads the bulls

Let us start in the East, with the canary in the coal mine. The Seoul Composite Index completely ignored the nuclear threat from its northern neighbor, surging in a strong primary up-trend.

Seoul Composite Index

Japan’s Nikkei 225 Index likewise ignored the threat of a nuclear DPRK, advancing strongly since breaking resistance at 21000.

Nikkei 225 Index

China’s Shanghai Composite Index is also advancing, albeit at a more modest pace.

Shanghai Composite Index

India’s NSE Nifty Index displays strong buying pressure, with Twiggs Trend Index oscillating above the zero line.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Dow Jones Euro Stoxx 600 broke resistance at 395 and is likely to test its 2015 high.

DJ Euro Stoxx 600

Despite BREXIT fears, the UK’s Footsie has recovered to test resistance at 7600. Breakout would offer a target of 8000*.

FTSE 100

* Target calculation: 7600 + ( 7600 – 7200 ) = 8000

The S&P 500 leads the pack. With Trend Index troughs above zero and barely a correction in sight, the index displays exceptional buying pressure. At some point the Fed will take the punch bowl away but the party is likely to continue in full swing until then.

S&P 500

All Ords breaks 6000

The All Ordinaries Index broke resistance at 6000, signaling a primary advance. Long-term target for the advance is 7000, but wait for retracement to respect the new support level.

ASX All Ordinaries Index

The ASX 200 closed above 5950 but below its 2015 high of 6000, indicating that small caps are advancing slightly faster than large caps.

ASX 200

The ASX 300 Banks index faces stubborn resistance at 8800. Reversal below the medium-term trendline at 8600 would warn of another test of primary support at 8000. With low capital leverage ratios and Sydney house prices now falling, the sector may be headed for testing times.

ASX 300 Banks

The ASX 300 Metals & Mining index is more bullish, breaking resistance at its three-year high of 3300 to signal another primary advance. I remain cautious because of iron ore weakness and rising Chinese interest rates but retracement that respects the new support level would confirm the advance.

ASX 300 Metals and Mining

The Australian Dollar is falling, iron ore is weak and banks face headwinds but the overall outlook remains (surprisingly) bullish.

The challenge of Xi Jinping’s Leninist autocracy

Like George Kennan’s long telegram, Martin Wolf lays out the challenges facing the West:

Whether you like it or not, history is on our side. We will bury you!” Thus in 1956 did Nikita Khrushchev, then first secretary of the Communist party of the Soviet Union, predict the future.

Xi Jinping is far more cautious. But his claims, too, are bold. “Socialism with Chinese characteristics has crossed the threshold into a new era,” the general secretary of the Communist party of China told its 19th National Congress last week. “It offers a new option for other countries and nations who want to speed up their development while preserving their independence.” The Leninist political system is not on the ash heap of history. It is, yet again, a model.

China has succeeded where past socialist systems have failed. Primarily because Deng Xiaoping recognized that a centrally planned economy was too inefficient. Instead he opted for a system that combined an open free market economy with tight political control. Effectively, a free market system ruled by an autocracy.

What are the implications of China’s marriage of Leninism and market. China has indeed learnt from the west in economics. But it rejects modern western politics. Under Mr Xi, China is increasingly autocratic and illiberal. In the Communist party, China has an ostensibly modern template for its ancient system of imperial sovereignty and meritocratic bureaucracy. But the party is now emperor. So, whoever controls the party controls all. One should add that shifts in an autocratic direction have occurred elsewhere, not least in Russia. Those who thought the fall of the USSR heralded the durable triumph of liberal democracy were wrong.

Will this combination of Leninist politics with market economics go on working as China develops? The answer must be: we do not know. A positive response could be that this system not only fits with Chinese traditions, but the bureaucrats are also exceptionally capable. The system has worked spectacularly so far. Yet there are also negative responses. One is that the party is always above the law. That makes power ultimately lawless. Another is that the corruption Mr Xi has been attacking is inherent in a system lacking checks from below. Another is that, in the long run, this reality will sap economic dynamism. Yet another is that as the economy and the level of education advances, the desire for a say in politics will become overwhelming. In the long run, the rule of one man over the party and that of one party over China will not stand.

It is likely that the Chinese “model” will collapse under its own weight, as its inherent weaknesses are exposed. But the West cannot afford to bury its head in the sand and ignore the rising threat.

History has shown that a combination of autocracy and economic power is dangerous for global stability. Untempered by the restraining influence of an effective democracy, autocracies tend to treat their own citizens harshly and their neighbors even harsher. Respect for rule of law, whether domestic law or international law, becomes subservient to the goals of their leaders.

Look no further than Russia’s behavior in Eastern Europe or China in Tibet and the South China Sea. Whether the objective is establishing a sphere of influence, a defensive cordon or global hegemony, rule of law and respect for the rights of others are the first casualty.

Autocracies are not to be trusted.

As Martin Wolf says “China is our partner. It is not our friend.”

The challenges to the West are clear:

  1. Get it’s political house in order
  2. Protect its intellectual property
  3. Ensure a level playing field on the economic front
  4. Don’t tolerate gradual encroachment and erosion of Western democratic standards

Source: The challenge of Xi Jinping’s Leninist autocracy

What Political Science Tells Us About the Risk of Civil War in Spain

Sara Plana is a PhD student in the Department of Political Science at MIT, and former country analyst for the Department of Defense in Washington, DC:

As soon as Friday, the Spanish government could take up arms against its own people. The Spanish parliament is set to approve a call by the central government to suspend Catalonia’s autonomy in response to the region’s successful independence referendum on Oct. 1. The parliament’s vote will kick off Spanish efforts to reassert control over the region—likely by force.

….This is just the latest unsettling sign that the standoff over Catalan independence could ignite wider violence and even civil war. Observers should not fall into the mistake of underestimating the prospects of civil war — as many were wont to do before the last major civil war on the European continent, over twenty years ago in the former Yugoslavia.

….In perhaps the most alarming parallel to Yugoslavia, a number of nations within Spain have separatist aspirations, and an independent Catalonia could be just the first of many dominos to fall.

What Can We Do Now?

Political science not only helps us predict conflict; it also offers insight on how to avoid it.

The Catalan regional government has indicated that it prefers negotiations, giving Spain several opportunities to pump the brakes on the looming conflict. The Spanish government could negotiate some appeasement of Catalonia’s economic grievance over redistribution (the major accelerant of the current independence push). Even many within Basque Country claim that separatist sentiment there has decreased in large part because Spain has successfully assuaged their economic resentment. The central government could also make amends for the recent forceful tactics and reverse the recent exclusionary legal verdicts that have fueled Catalans’ political grievances.

Spain could also forestall violence by avoiding actions that might enhance the security dilemma. Continued repression or heavy-handed governance would only increase Catalans’ perception that they need to defend themselves, which would in turn inspire Spain to do the same, creating a spiral of confrontation that is often hard to reverse….

Good advice that I hope will be heeded.

Source: What Political Science Tells Us About the Risk of Civil War in Spain

Seven Weeks of Gains, Seven Equity Themes | Bob Doll

Great market summary from Bob Doll at Nuveen Asset Management:

  1. Economic data remains strong and hurricane effects have been surprisingly muted. Real third quarter gross domestic product was reported to be 3.0%, with nominal growth hitting 5.2%. Both numbers came in higher than expected, with nominal growth reaching its strongest pace since 2006.
  2. Home sales are increasing, demonstrating that economic growth remains broad. New home sales hit their highest level since 2007.
  3. The Federal Reserve is on track to increase rates again in December. We expect the central bank will enact its third hike of the year, while continuing to reduce its balance sheet. Fed policy remains accommodative, but is clearly normalizing.
  4. Corporate earnings are on track for another strong quarter. We are past the halfway point of reporting season, and the vast majority of companies have beaten expectations. On average, companies are ahead of earnings growth expectations by 4.9%.
  5. Stock buybacks appear to have slowed, but companies are still deploying cash in shareholder-friendly ways. From our vantage point, we are seeing companies pour more resources into hiring and modest amounts of capital expenditures.
  6. Tax reform prospects still appear uncertain, but we have seen progress on the regulatory front. While President Trump has struggled to enact his pro-growth legislative agenda, he has had success in rolling back regulatory enforcement. The financial and energy sectors in particular appear to be benefiting from less scrutiny.
  7. It is possible that tax reform will focus on corporate rather than individual rates. The most controversial aspects of tax reform are focused on possible changes to individual tax rates (such as arguments over the deductibility of state and local taxes). In contrast, corporate tax reform appears less controversial, as Congress seems to have broad agreement on the need to reduce corporate taxes and solve the issue of overseas profits. While still a small probability, Republicans may choose to separate the two issues and proceed solely on a corporate tax bill.

Economic growth remains muted but earnings are exceeding expectations. High levels of stock buybacks in the last few years must be playing a part.

Rising home sales are a bullish sign.

The Fed remains accommodative for the present but I expect increasing inflationary pressure to temper this next year.

Slow rates of investment remain a cause for concern and could hamper future growth — buybacks are cosmetic and won’t solve the low growth problem in the long-term.

Corporate tax reform would be a smart move, creating a more level playing field, while avoiding the acrimony surrounding individual tax rates.

Stage 3 of the bull market continues…..

Source: Weekly Investment Commentary from Bob Doll | Nuveen