East to West: Asian stocks find support

Asian stocks are finding support after a sell-off over the last three months.

The Shanghai Composite Index is showing a slight bullish divergence on the Trend Index. This is secondary in size and suggests a bear market rally.

Shanghai Composite Index

South Korea’s Seoul Composite Index displays a stronger bullish divergence. Breakout above 2350 and the descending trendline is still unlikely but would indicate that a bottom is forming.

Seoul Composite Index

Japan’s Nikkei 225 broke through resistance at 23,000, signaling an advance to the January high at 24,000.

Nikkei 225 Index

India shows strong buying pressure, with long tails on the Nifty suggesting another strong advance.

Nifty Index

Europe

Dow Jones Euro Stoxx 600 is trending lower. Support at 374 is secondary but the Trend Index near zero indicates hesitancy.

DJ Euro Stoxx 600 Index

The Footsie found medium-term support at 7250 but a declining Trend Index warns of another test of primary support at 6900/7000.

FTSE 100 Index

North America

The S&P 500 retracement respected support at 2875, suggesting an advance to the long-term target of 3000.

S&P 500

Canada’s TSX 60 on the other hand is undergoing a correction, perhaps exacerbated by concerns over NAFTA. Expect support at 935/940.

TSX 60 Index

Nothing much has changed. While Japan and India are bullish, China and South Korea remain in a bear market. Europe looks hesitant, while the S&amp:P 500 continues in a strong bull market.

The generally accepted view is that markets are always right — that is, market prices tend to discount future developments accurately even when it is unclear what those developments are. I start with the opposite view. I believe the market prices are always wrong in the sense that they present a biased view of the future.

~ George Soros

East to West: US rallies, China falls

The S&P 500 is testing its January high at 2870. A rising Trend Index indicates buying pressure. Follow-through is likely to test resistance at 3000.

S&P 500

A monthly chart of the NASDAQ 100 illustrates tech stock strength, with a rally from 4500 to 7500 in just two years. Breakout above medium-term resistance at 7500 is more likely, offering a target of 8000, while a correction would test support at 7000. Breakout from the triangle pattern on the Trend Index would indicate index direction.

Nasdaq 100

Canada’s TSX 60 index is also advancing. A rising Trend Index suggests buying pressure. Retracement that respects support at 960 is likely and would signal another advance, with a target of 1040.

TSX 60

China paints the opposite picture, with the Shanghai Composite Index testing long-term support at 2700. Trend Index peaks below zero warn of selling pressure and breach of support would offer a long-term target of the 2014 low at 2000.

Shanghai Composite Index

Hong Kong’s Hang Seng Index broke support at 28,000/28,500 offering a long-term target of 25,000.

Hang Seng Index

South Korea’s Seoul Composite Index found support above 2200. Retracement to test new resistance at 2350 is likely. A lot depends on progress in peace negotiations with North Korea.

Seoul Composite Index

Japan’s Nikkei 225 is consolidating between 23,000 and 24,000 suggesting uncertainty over fallout from a threatened US-China trade war.

Nikkei 225

India is more on the periphery of current trade disputes, with the Nifty continuing its advance toward a target of 12,000.

Nifty

In Europe, Dow Jones Euro Stoxx 600 continues to reflect uncertainty, with long-term consolidation below 400. Breakout would signal a fresh advance but don’t hold your breath. It could take a while.

Dow Jones Euro Stoxx 600

The Footsie is retracing to test support at 7500 but respect is likely and would offer a target of 8000.

FTSE 100

North America clearly leads the global recovery, while Asia lags. Europe is sandwiched in the middle, with potential loss of trade in the East and West if a trade war erupts.

Thucydides once wrote “When one great power threatens to displace another, war is almost always the result.” In his day it was Athens and Sparta but in the modern era, war between great powers, with mutually assured destruction (MAD), is most unlikely. What we are witnessing is negotiation to define rules for peaceful coexistence in the 21st century. A lack of clear rules increases the risk of miscalculation and rapid escalation to a hard conflict.

Absent the willingness to use military force, the country with the greatest economic power is in the strongest position to set the rules.

War is a matter not so much of arms as of money.

~ Thucydides (460 – 400 B.C.)

Bears in the East, Bulls in the West

Market fears of a trade war appear to be easing but investors in China and South Korea remain cautious.

The Shanghai Composite Index is retracing to test resistance at the former primary support level at 3000.

Shanghai Composite Index

Dow Jones – UBS Commodity Index shows a similar retracement in commodity prices.

DJ-UBS Commodity Index

While crude oil prices have found support at the LT rising trendline.

Nymex Light Crude

South Korea’s Seoul Composite Index is in a primary down-trend but retracement to test the former primary support level at 2350 is likely.

Seoul Composite Index

Japan is more isolated and the Nikkei 225 is testing resistance at 23,000. A rising Trend Index suggests that breakout is likely, which would test the January high at 24,000.

Nikkei 225 Index

India is stronger, with the Nifty breaking resistance at its January high of 11,100 to signal a primary advance with a target of 12,000. But first, expect retracement to test the new support level.

Nifty Index

Europe

Dow Jones Euro Stoxx 600 was boosted by news that the EU-US trade dispute is settled. A Trend Index trough above zero signals strong buying pressure. and another test of 400 is likely.

DJ Euro Stoxx 600 Index

A bullish saucer pattern on the Footsie suggest further gains. The Trend Index trough above zero indicates buying pressure. Breakout of the index above 7800 would signal another advance, with a target of 8200.

FTSE 100 Index

North America

The Nasdaq 100 retreated when Facebook (FB) and Twitter (TWTR) reported disappointing growth for the quarter. Bearish divergence on the Trend Index warns of selling pressure but this appears secondary and support at 7000 is likely to hold. Respect would confirm another advance.

Nasdaq 100

Friday’s retreat is also evident on the S&P 500 daily chart. Expect retracement to test new support at 2800. A strong GDP result should strengthen support.

S&P 500

Canada’s TSX 60 retraced to test the new support level at 970. Respect would signal a test of 1000 but breach is as likely, testing support at 940.

TSX 60 Index

Zombie banks or zombie economies?

The last three decades was the era of zombie banks, with financial crises threatening the very survival of our financial system. Major banks close to the edge of the precipice, first in Japan but followed by the USA and Europe, were only rescued by drastic action by central banks. The flood of easy money kept the zombie banks afloat but every action has unintended consequences, especially when you are the Fed, BOJ or ECB.

Fed Balance Sheet and Funds Rate Target

Now that the Fed is attempting to unwind its swollen $4.4 trillion balance sheet — see The Big Shrink Commences — and normalize interest rates, Stephen Bartholomeusz at The Age highlights some of the unforeseen consequences:

US rate hikes are already sending threatening ripples through other economies as capital flows towards the US and the US dollar strengthens.

Argentina has sought assistance from the International Monetary Fund. Turkey, Indonesia, the Philippines, Brazil, India and Pakistan have all been forced to raise their rates to defend their currencies.

US monetary policy and its rate structure is setting it apart from most of the rest of the developed world in a fashion that will impose pressure on economies that may be more fragile than they might previously have been regarded in an ultra-low global rates environment.

…..A consequence of the policies pursued by the Fed, the ECB and the Bank of Japan since 2008 has been a significant increase in global debt – at government, corporate and household levels – as ultra-low rates and torrents of liquidity ignited a global borrowing binge.

There was a particular appetite in developing economies for US dollar-denominated debt, which became abundant and cheap as US investors were incentivised and enabled by the Fed to take on more risk in return for higher returns.

The US rate rises, combined with a stronger US dollar, are now putting a squeeze on emerging market economies.

If the ECB were to also start unwinding its stimulus, economies and banking systems within the weaker southern regions of the eurozone would come under intense pressure, along with more debt-laden companies.

It shouldn’t come as a surprise to anyone that after a decade of unprecedented policy interventions in economies and markets there could be unintended consequences that emerge as those policies are wound back.

The ECB indicated overnight that it will halt bond purchases at the end of 2018 and plans to keep interest rates accommodative “through the summer of 2019 and in any case for as long as necessary…”

ECB unwinding still appears some way off but tighter monetary conditions emanating from the Fed may be sufficient. Developing economies that gorged on low-rate US dollar-denominated debt during the liquidity surge are finding themselves in difficulties as the tide goes out.

Meanwhile in Australia

From Karen Maley at the AFR:

Australian banks are being squeezed by higher borrowing costs as the US Federal Reserve accelerates its interest rate hikes and drains liquidity from global financial markets…..

The woes of the local banks have been exacerbated by an unexpected and savage spike in a key Australian short-term interest rate benchmark – the three-month bank bill swap rate, or BBSW, in the past few weeks.

Analysts estimated that the spreads paid by Australian banks have climbed by close to 40 basis points since the beginning of the year, which has swollen the wholesale borrowing costs of the country’s banks by some $4.4 billion a year.

The ASX 300 Banks Index is headed for a test of primary support at 7000/7200. Breach of 7000 would warn of another decline, with a long-term target of the September 2011 low at 5000.

ASX 300 Banks Index

Aussie banks are being squeezed by higher interest rates on their international borrowing but are unable to pass this on to borrowers for fear of upsetting the local housing market. House prices are already under the pump, especially in the top end of the market.

Zombie banks would be too harsh but Aussie banks are in for a rough time over the next year or two.

Around the markets: Hong Kong & India bullish

Canada’s TSX 60 continues to test resistance at the former primary support level of 900. Bearish divergence on Twiggs Money Flow warns of strong selling pressure. Decline below 880 would confirm a primary down-trend, with an initial target of 865*.

TSX 60 Index

* Target calculation: 900 – ( 935 – 900 ) = 865

The Footsie recovered above 7400 but bearish divergence on Twiggs Money Flow warns of long-term selling pressure. Another test of primary support at 7100 remains likely.

FTSE 100 Index

European stocks are taking a beating, with the Dow Jones Euro Stoxx 50 Index testing support at 3400. Sharp decline on Twiggs Money Flow warns of selling pressure. Breach of 3400 would warn of a test of 3200.

DJ Euro Stoxx 50 Index

* Target calculation: 3650 – ( 3650 – 3450 ) = 3850

India’s Sensex remains in a bull market.

BSE Sensex

* Target calculation: 29000 + ( 29000 – 26000 ) = 32000

As does Hong Kong’s Hang Seng Index.

Hang Seng Index

* Target calculation: 24000 – ( 24000 – 21500 ) = 26500

While China’s Shanghai Composite index ranges between 3000 and 3300. Government interference remains a concern.

Shanghai Composite Index

Round the world: India & Hong Kong advance, Canada falters

Canada’s TSX 60 retraced to test resistance at the former primary support level of 900. Respect is likely and would signal a bear market. Decline of Twiggs Money Flow/Trend Index below zero would strengthen the bear signal. Medium-term target for the decline is 865*.

TSX 60 Index

* Target calculation: 900 – ( 935 – 900 ) = 865

The Footsie is losing momentum, with penetration of successive trendlines and declining Twiggs Trend Index. A test of primary support at 7100 is likely.

FTSE 100 Index

Dow Jones Euro Stoxx 50 Index, representing the 50 largest stocks in the Euro Zone, found support above 3400. Penetration of the declining trendline would indicate the correction is over and suggest the start of another advance — confirmed if the index breaks its recent (May 2017) high.

DJ Euro Stoxx 50 Index

* Target calculation: 3650 – ( 3650 – 3450 ) = 3850

It’s full steam ahead for India’s Sensex. Trend Index troughs above zero indicate strong buying pressure. Expect some profit-taking at the target of 32000* but any correction is likely to be shallow as the bull market gathers momentum.

BSE Sensex

* Target calculation: 29000 + ( 29000 – 26000 ) = 32000

Hong Kong’s Hang Seng Index has also reached its target of 26500. Again Trend Index troughs above zero indicate solid buying pressure.

Hang Seng Index

* Target calculation: 24000 – ( 24000 – 21500 ) = 26500

China’s Shanghai Composite index is also rallying but I remain wary of government intervention.

Shanghai Composite Index

India: Sensex bullish

Narrow consolidation around 31000 is a bullish sign for India’s Sensex. Breakout above 31500 would signal a fresh advance. Twiggs Trend Index and Twiggs Money Flow both indicate healthy LT buying pressure. Target for an advance is 33000*.

BSE Sensex

* Target: 31500 + ( 31500 – 30000 ) = 33000

India: Sensex tests support

India’s Sensex continues to test medium-term support at 31000. Bearish divergence on Twiggs Money Flow indicates medium-term selling pressure. Respect of support would offer a target of 32000*. Completion of a second narrow consolidation, after the first between 29000 and 30000, would signal a strong bull market. Breach of support, however, would warn of a correction to 30000.

BSE Sensex

* Target: 29000 + ( 29000 – 26000 ) = 32000

India’s Sensex consolidates

India’s Sensex is consolidating above its new (medium-term) support level at 31000. Bearish divergence on Twiggs Money Flow indicates medium-term selling pressure. Target for the advance is 32000* but further testing of the new support level is likely.

BSE Sensex

* Target: 29000 + ( 29000 – 26000 ) = 32000

India: Sensex advance

India’s Sensex continues to advance, breaking resistance at 31000. Rising Twiggs Money Flow indicates long-term buying pressure. Target for the advance is 32000* but expect retracement to first test the new support level.

BSE Sensex

* Target: 29000 + ( 29000 – 26000 ) = 32000