Category: Countries & Regions

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Asia steadies

China’s Shanghai Composite Index steadied and is again testing resistance at 3100. Breakout would signal a primary up-trend. Rising troughs on Twiggs Money Flow indicate buying pressure.

Shanghai Composite Index

Japan’s Nikkei 225 Index rallied for another test of resistance at 17000. Breakout above 17000 would suggest a primary up-trend. Follow-through above 17600, completing a broad double-bottom, would confirm. Further consolidation, however, is more likely.

Nikkei 225 Index

India’s BSE Sensex broke out of its narrow rectangle at 28000, signaling another advance. Expect a test of the 2015 high at 30000. Bearish divergence on Twiggs Money Flow now appears misleading.

SENSEX

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Europe on the mend

Germany’s DAX is holding above its new support level at 10500. Respect, with follow-through above 10800, would confirm the primary up-trend.

DAX

* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

France’s CAC-40 Index is consolidating in a narrow band between 4400 and 4500. Upward breakout would suggest a primary up-trend. Follow-through above 4600, completing a broad double bottom, would confirm. Rising Twiggs Money Flow reflects buying pressure.

CAC-40

The Footsie retreated from resistance at 7000 but short candles and strong Twiggs Money Flow, high above zero, suggest long-term buying pressure. Expect strong resistance between 7000 and 7100. Correction to 6500 would establish a more stable base for further advances.

FTSE 100

* Target calculation: 6500 + ( 6500 – 5900 ) = 7100

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Gold steady as rates fall

Interest rates retreated this week, with 10-year Treasury yields falling below support at 1.60 percent.

10-year Treasury Yield

Falling interest rates reduce downward pressure on gold. Spot Gold steadied above support at $1300/ounce. Momentum above zero continues to indicate a primary up-trend. Respect of support at $1300 would confirm. Breach of support is unlikely but would signal trend weakness and a test of primary support at $1200/ounce.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

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Europe strengthens

Germany’s DAX respected its new support at 10500. Follow-through above 10800 would confirm the primary up-trend.

DAX

* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

Italy’s FTSE MIB (Milano Italia Borsa) Index remains in a primary down-trend. Breakout above 17000 and the descending trendline, however, would suggest that a base is forming. Rising Twiggs Money Flow highlights buying pressure.

FTSE MIB

The Footsie retreated from resistance at 7000 but short candles and rising Twiggs Money Flow suggest buying pressure. Expect another test of 7000/7100 but resistance is strong. Correction to 6500 would establish a more stable base for further advances.

FTSE 100

* Target calculation: 6500 + ( 6500 – 5900 ) = 7100

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Asia pulls back

China’s Shanghai Composite Index retreated below resistance at 3100. Prospects of a primary up-trend have dimmed and further consolidation between 2800 and 3100 is likely.

Shanghai Composite Index

Japan’s Nikkei 225 Index is pretty directionless, retreating from resistance at 17000. Breach of 16000 would warn of another test of primary support at 15000. But a broad base between 15000 and 17000 is likely.

Nikkei 225 Index

India’s BSE Sensex is the most promising, consolidating in a bullish narrow range around 28000. Upward breakout would signal a further advance towards the 2015 high of 30000. Bearish divergence on Twiggs Money Flow warns of long-term selling pressure, however, and downward breakout would warn of a correction to 25000 or 26000.

SENSEX

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Gold, rising interest rates and the falling Yuan

Interest rates are rising. Upward breakout from an ascending triangle formation on 10-year Treasury yields indicates an up-trend.

10-year Treasury Yield

A rate hike from the Fed would increase pressure on the Chinese Yuan, leaving the PBOC with a dilemma. Either allow the Yuan to slide, which could panic investors and borrowers into a rout, or sell off more of its $3.2 trillion foreign exchange reserves to slow Dollar appreciation against the Yuan.

USDCNY

Long tails on USDCNY indicate buying at the 6.60 support level. Breakout above 6.70 would warn of another advance (decline for the Yuan).

Rising interest rates increase downward pressure on gold but a falling Yuan would boost demand as a store of value. Spot Gold is above the rising trendline on a weekly chart but expect a test of support at $1300/ounce. Momentum holding above zero continues to indicate a healthy primary up-trend. Respect of support at $1300 would confirm. Breach of support remains unlikely but would signal trend weakness and a test of primary support at $1200.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

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How to Counter the Putin Playbook | The New York Times

Michael A. McFaul, director of the Freeman Spogli Institute and a senior fellow at the Hoover Institution, both at Stanford, served as United States ambassador to the Russian Federation from 2012 to 2014:

…We will not find security in isolationism. No missile defense shield, cybersecurity program, tariff or border wall can protect us if we disengage. Menacing autocracies, illiberal ideas, and antidemocratic and terrorist movements will not just leave us alone or wither away. The threats will grow and eventually endanger our peace, as we saw in Europe and Japan in the 1930s, and Afghanistan in the 1990s.

Conversely, the growth of democracy around the world serves American interests. Democracies do not threaten us; autocracies do. Democratic allies also vote with us at the United Nations, go to war with us, support international treaties and norms, and stand with us against tyranny.

So we must push back, in new ways. Just as the Kremlin has become more sophisticated at exporting its ideas and supporting its friends, so must we.

We should think of advancing democratic ideas abroad primarily as an educational project, almost never as a military campaign. Universities, books and websites are the best tools, not the 82nd Airborne. The United States can expand resources for learning about democracy……

I agree with the sentiment but not the execution. Win friends by promoting education and building infrastructure abroad. These have practical, tangible benefits to citizens of developing nations. Democracy can come later. In many parts of the world it is as foreign a concept as gay marriage.

Source: How to Counter the Putin Playbook – The New York Times

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Beware of recency bias

Every the year the 2016 Russell Investments/ASX Long-term Investing Report provides an invaluable summary of before and after-tax returns on various asset classes for Australian investors, over 10 and 20 years.

Naive investors are likely to automatically pursue the asset classes that offer the highest yields. Recent performance is more likely to attract our attention than more stable longer-term performance. Josh Brown highlighted last year that mutual funds that attracted the most new investment tended to underperform funds that attracted the least new inflows. I suspect that the same applies to asset classes.

If we consider each of the asset classes highlighted, it is clear that performance over the next 10 years is likely to be substantially different from the last decade.

Australian Asset Classes 10-year Performance to 31 December 2015

Source: 2016 Russell Investments/ASX Long-term Investing Report

Australian Shares

Australian Shares endured a (hopefully) once-in-a-lifetime financial crisis in 2008. 10-Year performance is going to look a lot different in two years time (20-years is 8.7% p.a.). Prices of Defensive stocks, on the other hand, have since been inflated by record low interest rates.

Residential Property

Residential property prices boomed on the back of low interest rates and an influx of offshore investors. But growth is now slowing.

RBA: Australian Housing Growth

Listed Property

REITS were smashed in 2008 (20-years is 7.7% p.a.). But before contrarians leap into this sector they should consider the impact of low interest rates, with many trading at substantial premiums to net asset value.

Bonds & Cash

Low interest rates again are likely to impact future returns.

Global Shares

Global Shares also weathered the 2008 financial crisis (20-year performance (unhedged) is 6.4% p.a.). Subsequent low interest rates had the greatest impact on Defensives, while Growth & Cyclicals trade at more conservative PEs.

I won’t go through the rest of the classes, but there doesn’t seem to be many attractive alternatives. It may be a case of settling for the cleanest dirty shirt, and the least smelly pair of socks, in the laundry basket.

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Defensive PE at a dangerous high

Low interest rates and the accompanying search for yield have driven the forward Price-Earnings ratio for Defensives to a 20-year high. This is likely to reverse when (not if) rates eventually rise. Cyclicals and Growth, however, still look reasonable.

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