The disconnect between long-term and short-term rates

Bob Doll highlighted the disconnect between long-term and short-term rates in his latest review. The chart below plots the 3-month T-bill rate against 10-year Treasury yields.

Spot Gold/Light Crude

At this stage, the disconnect is not significant. But a disconnect as in 2004 – 2005 is far more serious. Large Chinese purchases of Treasuries prevented long-term rates from rising in response to Fed tightening, limiting the Fed’s ability to contain the housing bubble.

China: Stay clear

“Never trade against the central bank” is a golden rule of trading. Rule #2 should be: “When the central bank behaves erratically, stay clear.” The PBOC announced a crackdown on wealth management products in May but alarm at the rapid contraction elicited a quick retraction.

The Shanghai Composite Index broke support at 3050/3100 signaling a primary decline. But the PBOCs sudden reversal spurred a recovery, with the index now likely to test resistance at 3300. Rising Twiggs Money Flow indicates buying pressure. Reversal below 3050 is unlikely but would confirm a primary down-trend.

Shanghai Composite Index

Shanghai retraces

The Shanghai Composite Index retraced to test support at 3100. The decline on Twiggs Money Flow indicates long-term selling pressure. Reversal below 3000 would confirm a primary down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Why we’re selling all shares and handing cash back to investors – Philip Parker | Livewire

Philip Parker – veteran fund manager decides to sell all shares in Altair’s Trusts to hand back cash and hands back mandates for SMA/IMA’s and also sells MDA family office mandates to cash from shares.

Why?
AUSTRALIAN EAST COAST PROPERTY MARKET BUBBLE AND THE IMPENDING CORRECTION
CHINA PROPERTY AND DEBT ISSUES LATER THIS YEAR
THE OVERVALUED AUSTRALIAN EQUITY MARKETS AND
OVERSIZED GEO-POLITICAL RISKS AND AN UNPREDICTABLE US POLITICAL ENVIRONMENT

The underlined above are some of the more obvious reasons to exit the riskier asset markets of shares and property – in my opinion.

As a result of the above and after 25 years as a fund manager and 30 years in this industry I am taking around 6 to 12 months off. The main reason is in my opinion that there are just too many risks at present, and I cannot justify charging our clients fees when there are so many early warning lead indicators of clear and present danger in property and equity markets now….

Read more at: Why we’re selling all shares and handing cash back to investors – Philip Parker | Livewire

Shanghai intervention

The Shanghai Composite Index recovered above primary support at 3100, after the state moved quickly to ease contractionary pressures from the recent crackdown on wealth management products. Rising Twiggs Money Flow signals buying pressure but the situation is artificial. Normally breach of primary support would elicit strong selling.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Beijing eases pressure

China’s PBOC eased up on its crackdown on wealth management products (WMPs) and related bank lending. The resulting fall-off in new credit and a spike in interbank lending rates threatened to precipitate a sharp contraction.

Copper rallied off long-term support at 5400. The reaction is secondary and breach of 5400 remains likely, signaling a primary down-trend.

Copper A Grade

Iron ore is consolidating in a narrow bearish pattern above support at 60. Breach seems likely and would signal another decline, with a target of 50*.

Iron Ore

* Target: 60 – ( 70 – 60 ) = 50

Shanghai’s Composite Index rallied to test its new resistance level at 3100, after breach signaled a primary down-trend. Respect would confirm the decline, with a medium-term target of 2800*, but government intervention may bolster support. Recovery above 3100 would mean all bets are off for the present.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Shanghai breaches support

Copper is testing long-term support at 5400, suggesting weak demand from China. Breach would signal a primary down-trend.

Copper A Grade

The Yuan has enjoyed a respite, consolidating in a narrow line for several weeks. But this is likely to prove temporary, with further advances of the Dollar against the Yuan eroding PBOC foreign exchange reserves.

USDCNY

Shanghai’s Composite Index broke support at 3100, signaling a primary down-trend, but the long tail indicates buying support. Recovery above 3100 would suggest a false signal (or government intervention) while respect of resistance would confirm the down-trend.

Shanghai Composite Index

* Target medium-term: May 2016 low of 2800

Dr Copper tests support

Copper is widely considered to be a barometer of the global economy, with prices rising when the outlook improves. Currently A-grade Copper is testing support at 5400. Breach would confirm Chinese selling pressure, offering a target of long-term support at 4500.

A-grade Copper

China’s Great Cleansing Has Begun | Basis Point

From David Chin at Basis Point:

….China’s commodity futures markets are the ‘canary in the coalmine’ for hints that the markets may be in for an even wilder ride.

Most WMPs [wealth management products] have a maturity between 1-4 months and managers of these WMPs need their Chinese retail investors to roll over by buying new WMPs. If this stops or slows, (which is happening now – see Bloomberg) it will result in assets being force-sold by fund managers to pay back expiring WMPs. The liquid assets that have boomed in recent months such as iron ore futures, will be, and have been, the first to be sold. Next to be sold will be shares, international assets and local property and local corporate bonds if there is still a functioning market for them.

Source: China’s Great Cleansing Has Begun – Basis Point