China’s announcement of economic stimulus and hints at an even larger “bazooka” ahead caused a sizzling rally on the Shanghai exchange, with the CSI 300 leaping 20% in the last week of September.
Hong Kong’s Hang Seng Index displays an even steeper rally.
However, a failure to follow through this week with sufficient detail of the stimulus package caused the rally to fizzle, with a sharp correction on both indices. Today, the Hang Seng is testing support at 20500.
Crude Oil
Brent crude reversed sharply as prospects faded for a demand recovery in China.
Treasury Markets
Ten-year Treasury yields stalled and will likely re-test new support at 4.0%.
According to the theory of interest developed by Swedish economist Knut Wicksell, the equilibrium or natural rate of interest—at which inflationary and deflationary pressures are in balance—is when the cost of borrowing is higher than the average return on new investment. This means that the 10-year Treasury yield–the risk-free rate–should be roughly equal to nominal GDP growth, approximating the return on new investment. The chart below shows that the 10-year Treasury yield, at 4.0%, is significantly lower than nominal GDP growth of 5.7% for the 12 months ended in Q2.
With the economy showing little sign of slowing, the likely outcome is either higher long-term interest rates or a build-up of long-term inflationary pressure.
Stocks
The S&P 500 gained almost 1.0% on Tuesday, with a shallow retracement and rising Trend Index troughs signaling buying pressure.
Nvidia led the advance of mega-cap stocks, breaking above its August high, while all seven advanced yesterday.
The equal-weighted index lagged as large caps failed to match mega-cap gains.
Financial Markets
Bitcoin continues to test the upper border of its trend channel. A breakout would be a bullish sign for financial market liquidity.
Dollar & Gold
The Dollar Index is expected to retrace to test new support at 102. Respect would confirm an advance to 104.
Gold is headed for a test of support at $2,600 per ounce, but respect will likely confirm a re-test of $2,700.
Silver is testing support at $30 per ounce, with respect again likely to signal a re-test of resistance at $32.
Metals
Copper retreated in response to China’s disappointing stimulus. Expect a correction to test support at $9,250 per tonne.
Iron ore also reflects disappointment, retreating to $106.30 per tonne.
Conclusion
A disappointing lack of detail on China’s newly announced stimulus led to a retreat in Chinese stocks and global crude oil, copper, and iron ore.
Ten-year Treasury yields are expected to retrace to test support at 4.0%. While yields are likely to remain low as the Fed cuts interest rates, the long-term equilibrium rate is expected to be higher—between 5% and 6%.
Respect of support at 5650 on the S&P 500 confirms our year-end target of 6000, but the advance is exceedingly narrow and precarious.
Gold is headed testing support at $2,600 per ounce, but respect is likely and would signal a re-test of $2,700.
Acknowledgments
- CoinDesk: Bitcoin Prices