Trade tariff impact on China & Australia

The yuan is falling as threat of a tariff war rises.

Yuan

The Shanghai Composite Index is testing its 2016 low at 2700. Breach would warn of a decline to the 2014 low at 2000.

Shanghai Composite Index

Commodity prices are plunging in anticipation of falling demand from China.

DJ-UBS Commodity Index

Chinese monthly iron ore imports are down at 83.24 mt, compared to earlier peaks of 100 mt earlier in 2017. Iron ore spot price is testing primary support $63/tonne. A Trend Index peak below zero warns of selling pressure. Breach of support is likely and would warn of a decline to $58/tonne.

Iron Ore

A falling Aussie Dollar may cushion local resources stocks from some of the impact.

Australian Dollar

But ASX 300 Metals & Mining index continues to test medium-term support at 3800. Breach of support is likely and would warn of a correction to test the rising trendline.

ASX 300 Metals & Mining

Resources stocks remain in a primary up-trend but I am bearish on the medium-term outlook.

Banks lift ASX 200

The ASX 300 Banks index continues to test resistance at 8000. Respect remains likely and would indicate another test of primary support at 7300.

ASX 300 Banks Index

Rising banks lifted the ASX 200. Follow-through above 6250 signals another primary advance, with a target of the October 2007 high at 6750.

ASX 200

This leaves me in a difficult position. Technical signals suggest a primary advance, while economic indicators warn of rising headwinds and a potential bear market.

Banks

The banking sector is being squeezed by higher funding costs, falling credit growth and rising default risk.

Gerard Minack from Minack Advisers warns that the current credit contraction could cause a significant fall in housing prices:

Most houses are bought on credit, so the demand for housing is a function of the supply of credit. Consequently, housing loan approvals have historically led house prices. New loan approvals have fallen by around 20% year-over-year several times over the past 25 years. If the current credit contraction is more severe – say, a decline of up to 30% – then nationwide house prices could fall high single digits over the coming year.

….All this suggests that a high single-digit decline in house prices would put a material dent in domestic demand. If prices were to fall by, say, 15%, and if consumer income growth was as tepid as it now is, there would be a good chance of recession.

Resources

A falling Chinese Yuan highlights the threat of trade tariffs to the Chinese economy.

CNY/USD

Commodity prices have responded, falling to test primary support levels.

DJ-UBS Commodity Index

Including iron ore.

Iron Ore

The ASX 300 Metals & Mining index is testing medium-term support at 3800. Breach is likely and would warn of a correction to test the rising trendline.

ASX 300 Metals & Mining

My approach is to sit with one foot either side of the fence. Focus on growth sectors. Stay away from Banks. Stay away from Resources but stay in Gold. And keep a healthy percentage of the Australian portfolio in Cash and reasonably secure interest-bearing investments. Definitely not hybrids.

Is ASX 200 resurgence sustainable?

The ASX 200 found support at 5950/6000, a bullish sign. Large bearish divergence on Twiggs Money Flow (13-week) continues to warn of selling pressure but breakout above 6150 would signal a fresh primary advance. Breach of 5950 is unlikely at present, but would warn of a test of primary support at 5650/5750.

ASX 200

The ASX 300 Banks decline continues, heading for a test of its 2016 low at 7200.

ASX 300 Banks

The ASX 300 Metals & Mining index breakout above 4000 is likely, offering a target of 4200.

ASX 300 Banks

The broad index looks bullish but I have two concerns. First is the weak banking index, representing the largest sector in the ASX 200. Second, iron ore prices are weakening. Spot prices are testing support at $62/tonne. A Trend Index peak below zero looks likely, and would warn of strong selling pressure. Breach of support at $58 would signal a primary down-trend.

Iron Ore

GDP growth recovered to 3.1% for the year ending 31 March 2018, on the back of strong exports, but the overall report card for the economy remains weak.

How QE reversal will impact on financial markets

The Federal Reserve last year announced plans to shrink its balance sheet which had grown to $4.5 trillion under the quantitative easing (QE) program.

According to its June 2017 Normalization Plan, the Fed will scale back reinvestment at the rate of $10 billion per month and step this up every 3 months by a further $10 billion per month until it reaches a total of $50 billion per month in 2019. That means that $100 billion will be withheld in the first year and $200 billion each year thereafter.

How will this impact on financial markets? Here are a few clues.

First, from the Nikkei Asian Review on January 11:

The yield on the benchmark 10-year U.S. Treasury note shot to a 10-month high of 2.59% in London, before retreating later in the day and ending roughly unchanged in New York. Yields rise when bonds are sold.

The selling was sparked by reports that China may halt or slow down its purchases of U.S. Treasury holdings. China has the world’s largest foreign exchange reserves — holding $3.1 trillion, about 40% of which is in U.S. government notes, according to Brad Setser, senior fellow at the Council on Foreign Relations.

Chinese officials, as expected, denied the reports. But they would have to be pondering what to do with more than a trillion dollars of US Treasuries during a bond bear market.

Treasury yields are rising, with the 10-year yield breaking through resistance at 2.60%, signaling a primary up-trend.

On the quarterly chart, 10-year yields have broken clear of the long-term trend channel drawn at 2 standard deviations, warning of reversal of the three-decade-long secular trend. But final confirmation will only come from a breakout above 3.0%, completing a large double-bottom.

Withdrawal or a slow-down of US Treasury purchases by foreign buyers (let’s not call them investors – they have other motives) would cause the Dollar to weaken. The Dollar Index recently broke support at 91, signaling another primary decline.

The falling Dollar has created a bull market for gold which is likely to continue while interest rates are low.

US equities are likely to benefit from the falling Dollar. Domestic manufacturers can compete more effectively in both local and export markets, while the weaker Dollar will boost offshore earnings of multinationals.

The S&P 500 is headed for a test of its long-term target at 3000*.

Target: 1500 x 2 = 3000

Emerging market borrowers may also benefit from lower domestic servicing costs on Dollar-denominated loans.

Bridgewater CEO Ray Dalio at Davos:

We are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws…

If there is a downside, it is likely to be higher US inflation as employment surges and commodity prices rise. Which would force the Fed to raise interest rates faster than the market expects.

ASX banks spoil the iron ore party

I underestimated the strength of iron ore which has now broken resistance at 70, suggesting that a bottom is forming. Strength of the latest rally indicates that the next correction is likely to find support at 60.

Iron Ore

The Resources sector responded, with the ASX 300 Metals & Mining index headed for a test of its February high at 3200 after recovering above support at 3000.

ASX 300 Metals & Mining

Banks have been on the receiving end, however, with the ASX 300 Banks index testing short-term support at 8500. A Twiggs Money Flow peak below zero warns of strong selling pressure. Breach of 8500 would signal another test of primary support at 8000.

ASX 300 Banks

The ASX 200 continues to form a narrow line, consolidating between 5600 and 5800. Declining Twiggs Money Flow, with a peak below zero, warns of selling pressure. Breach of support at 5600 remains likely, despite the iron ore rally, and would signal a primary down-trend.

ASX 200

ASX stalls

Iron ore is testing resistance at 70. Respect would warn of another test of primary support at 53, while breakout would suggest that a bottom is forming and the next correction is likely to find support at 60.

Iron Ore

The Resources sector remains wary, with the ASX 300 Metals & Mining index retreating after a false break above resistance at 3050.

ASX 300 Metals & Mining

The ASX 300 Banks index retraced from resistance at 8800, heading for a test of the rising trendline and short-term support at 8500. Twiggs Money Flow continues to warn of selling pressure despite indications from APRA that they are unlikely to require further capital raising. Reversal below 8500 would warn of another test of primary support at 8000.

ASX 300 Banks

The ASX 200 has stalled, consolidating between 5600 and 5800 over the last two months. Declining Twiggs Money Flow, with a peak below zero, warns of selling pressure. Breach of support at 5600 is more likely, with an ensuing down-trend, but a lot depends on how iron ore behaves in the next few weeks.

ASX 200

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

~ Mark Twain (Samuel Clemens)

ASX 200: It’s down to iron ore

Iron ore encountered resistance at $70 per ton. Another test of primary support at $53 is likely. But a failed down-swing would be a bullish sign.

Iron Ore

The ASX 300 Metals & Mining displays a similar pattern, retreating below 3000 after testing 3050. A failed down-swing that ends above 2750 would be a bullish sign, while breach of support at 2750 would confirm the primary down-trend.

ASX 300 Metals & Mining

APRA eased pressure on the big four banks to raise more capital; the ASX 300 Banks index responding with a rally to 8800. Retracement that respects support at 8500 would be a bullish sign, signaling continuation of the up-trend. The industry is still light on capital but recent remarks by APRA chair Wayne Byres indicate that they are prepared to tolerate a more gradual adjustment rather than a new round of capital raising. Dividends may still come under pressure, however, in banks with high payout ratios.

ASX 300 Banks

ASX 200 consolidation between 5600 and 5800 continues. Declining Twiggs Money Flow flags selling pressure. Breakout from the consolidation will indicate future direction but this is likely to be dominated by mining (iron ore) and the banks. If both are pulling in the same direction, the index is likely to follow. Banks are increasingly bullish but the question-mark over iron ore remains.

ASX 200

ASX buoyant as iron rallies

Iron ore broke resistance at $60 and is headed for a test of $70 per ton. This is a strong rally but it does not signal the end of the bear market. Only when the rally ends and there is another test of primary support at $53 will we be able to gauge long-term sentiment.

Iron Ore

The ASX 300 Metals & Mining index broke resistance at 3000, completing a double bottom reversal with a target of 3250. Breach of 2750 is unlikely at present but would signal a primary down-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index is testing resistance at 8500 but Twiggs Money Flow below zero continues to warn of long-term selling pressure. Breach of 8000 remains likely and would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 is consolidating in a small triangle (some would call this a large pennant) between 5600 and 5800. Breakout will signal future direction. A lot will depend on iron ore (China) and the banks, which seem to be pulling in opposite directions at present.

ASX 200

ASX 200: Banks run into strong resistance

Iron ore peaked at $60. Expect a sharp fall to test support between $50 and $52, typical of a bear market. Chinese housing price growth — a key driver of iron ore prices as illustrated last week — is slowing and likely to drag ore prices lower.

Iron Ore

The ASX 300 Metals & Mining index is still on the up but likely to respect resistance at 3000, given the reversal in iron ore. Breach of 2750 would confirm a primary down-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index ran into strong resistance at 8500. Declining Twiggs Money Flow highlights selling pressure. Breach of 8000 is likely and would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 displays strong selling pressure, with tall shadows on the last two weekly candles. Twiggs Money Flow dipping below zero for the second time warns of a primary down-trend. Follow-through below 5700 would test primary support at 5600. Breach of 5600 would complete a broad head and shoulders reversal, confirming a primary down-trend.

ASX 200