Shanghai: SSE Composite Index (.SSEC) Trade war is 2 years old, but China escapes with flesh wound
It was this day in 2018 that President Donald Trump fired the first salvo against China by raising tariffs on solar equipment and washing machines. The series of tariff hikes that ensued has slowed growth in the world’s two largest economies and erased $416 billion from Shanghai shares, or almost $300 for each of China’s 1.4 billion people.
But given the scale of Chinese markets, that loss looks modest, representing just 5% of its current $7.7 trillion capitalization. Bonds have been even more resilient, with the average yield on yuan-denominated debt falling by a third during this period. A weaker currency has left exports more competitive, while sovereign default risk, measured by credit-default swaps, has eased to a 13-year low.
As the U.S. and China move to the second phase of their trade talks, having signed a preliminary deal last week, the signal from China’s markets is one of strength. The nation’s technology and consumer-discretionary stocks are rallying, driving gains in the main gauge for emerging-market equities, as the upside from domestic demand outweighs risks on the trade front.
Here’s a recap of how emerging-market assets, and those of China, have behaved in the past two years:
The MSCI Emerging Markets Index fell 8.5%, contributing to a reduction of $1.79 trillion in overall market capitalization for the asset class.
However, it increased in number and size if you include MSCI’s promotion of Saudi Arabia and Argentina to the “emerging-market” bracket. When both those countries are considered, stock values actually increased by $623 billion since January 2018.
Not counting China or the new members, the price of the trade war paid by the 23 other emerging economies was $1.37 trillion in lost equity value. That’s a shrinkage of 6.8%.
A gauge of dollar-denominated bonds in emerging markets saw its average yield rise as trade tensions simmered. But the increase was a mere 11 basis points, to 4.72%.
Local-currency bonds performed better. The average yield on a Bloomberg Barclays index for this group fell 87 basis points, to 4.07%. One of the biggest beneficiaries, ironically, was China, where the opening up of the local bond market to foreign investors was the talk of the town.
The yield on yuan-denominated securities declined to 3.14%, a narrowing of 148 basis points in average borrowing costs.
MSCI’s emerging-market currency index slipped 2.6% since January 2018. In a period that would be remembered most for a Turkish meltdown and a new crisis in Argentina, a sudden drop in the yuan in the middle of 2018 briefly raised concerns of a currency war. The yuan then stabilized and is down 7.2% over the two years.
The Mexican peso and Indonesian rupiah rewarded carry traders, but overall, borrowing in the U.S. dollar and investing in emerging-market assets was a losing proposition: A Bloomberg gauge of carry positions in eight currencies fell 6.1%.
Currency volatility dropped, in line with global trends. A JPMorgan Chase index of three-month implied, or future, volatility fell to 6.1%, an almost 2 percentage-point drop from two years ago.
The MSCI currency index’s 100-day historical volatility has fallen to the lowest level since April 2013.
Most stocks, bonds and currencies are now better off than the depths of a sell-off in 2018. As the rebound gains momentum, the trade war seems to have been pushed to the back of traders’ minds.
Rising earnings estimates, expanding central-bank stimulus and the scope for fiscal support by developing nations such as India are likely to be the key investment themes of 2020. The main risks could be resurgent inflation, fears of a U.S. recession, the country’s presidential election in November and a vast array of idiosyncratic events that have become a regular feature of the emerging-market landscape.
Overall, the bias in prices is: Upwards.
By the way, prices are vulnerable to a correction towards 3,004.98.
The projected upper bound is: 3,123.59.
The projected lower bound is: 3,003.75.
The projected closing price is: 3,063.67.
A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 4 white candles and 6 black candles for a net of 2 black candles. During the past 50 bars, there have been 28 white candles and 22 black candles for a net of 6 white candles.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 40.5999. This is not an overbought or oversold reading. The last signal was a buy 2 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 53.22. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 6 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -218.This is an oversold reading. However, a signal isn’t generated until the indicator crosses above -100. The last signal was a sell 10 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 4 period(s) ago.
Rex Takasugi – TD Profile
SSE COMPOSITE closed up 8.613 at 3,060.754. Volume was 26% above average (neutral) and Bollinger Bands were 6% narrower than normal.
Open High Low Close Volume___
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 3,085.79 2,983.50 2,967.44
Volatility: 13 13 19
Volume: 21,596,426,240 19,053,293,568 20,114,601,984
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
SSE COMPOSITE is currently 3.1% above its 200-period moving average and is in an upward trend. Volatility is relatively normal as compared to the average volatility over the last 10 periods. Our volume indicators reflect moderate flows of volume into .SSEC (mildly bullish). Our trend forecasting oscillators are currently bullish on .SSEC and have had this outlook for the last 28 periods.
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