Archive for category Macroview

China Stock Market Dynamics–Only Happens In China

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China Stock Market Dynamics.  Massive bubble reaction with government intervention.

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China Holdings of US Treasury Declines Further

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China holding of US Treasury falls to the lowest level since 2013.  Reportedly, China held $1.25 trillion in U.S. debt as of October, a $13.6 billion drop from September.  China remains the largest foreign holder, ahead of Japan, who holds $1.22 trillion.  Now China and Japan have a very narrow difference in holdings of US Treasury debt.

China’s overall foreign-exchange reserves, the world’s largest, stood at $3.89 trillion at the end of the third quarter 2014, down from a record $3.99 trillion at the end of June.  Thus, US Treasury represents China’s 32% of the total Forex reserves compared to 34.9% a year ago in October 2013.

Chinese export and factory activities has declined in 2014 being one contributing factor. 

While the Chinese Yuan has weakened 1.3 percent since October, it’s remains the only one among 31 major global currencies (as reported by Bloomberg) to strengthen against the dollar.

As of November 2014, the most traded currencies globally are:

  1. US Dollar
  2. Euro Dollar
  3. Japanese Yen
  4. British Pound
  5. Australian Dollar
  6. Canadian Dollar
  7. Chinese Renminbi
  8. Swiss Franc
  9. Hong Kong Dollar
  10. Thai Baht

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China Market Upmove–Shanghai Stocks October 2014 Update

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China market is giving early signs of temporary stabilizing of economic activity.  We would expect the market be 6-9 month ahead of the economy.  Notice that SSEC (stocks) hit a “capitulative” sort of low mid June 2013 while Copper prices (fundamental economy) hits a similar low in March 2014 (almost 9 months later).

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Copper prices have retested the 3.00 prices with increased negative divergence signifying a base is being build.  With the global economy in slow down mode including China.  Activity here is key for revealing fundamentals in the Chinese economy.

If SSEC prices go pass the next resistance of 2450, we would expect a confirmation with Copper prices moving up.  Copper resistance is at 3.30.  However if prices go below 3.00 and break below 2.85 significantly, we would have a serious fundamental problem.

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With all this said, SSEC next resistance of 2450 and then 2500 will determine the next move.  However, this strong move (nearly 130% up) is reaching now overbought conditions with wide resistance at 2450 and 2500.  We can expect prices to come to 2300 or 2250 to rest which will allow us to see the next move ahead.

At this moment, we are watching the minuteness of a macro trend reversal which obviously has many twist and turns.  If we can be 80% it would already exceptional.

October 10, 2014

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We are resuming recording of important trading events.

On September 18, the system gave a signal with a potential for a long term effect.  A SHORT signal was received at 2010.00 with conditions significantly overbought in the S&P 500 equity index.

This is shown in the following chart:

2014 calling top Sep 18

Noticed that the negative divergence around September 1 from the last Uptrend leg that started in Aug. 7.  A classical Wave 4 (value of divergence was 0) and a final exhaustion move with large price increase but little energy (divergence – in blue – did not reach the strength from before even though prices went up – ie an empty move – all signs of exhaustion confirmed by overbought conditions).

That makes this move more interesting is the prices of Copper (in our opinion) which have now returned to test the low 3.00 mark and fundamental events regarding global economic slowness in the last remaining economic pedestal – China. The correction of China economic contraction is gaining attention especially with Hong Kong social unrest from the “Occupy Movement”.  (Hong Kong is key for bonds for the Asian region including China). 

With the US zigzag GDP estimated at 2% now and Europe remaining at an anemic 1% and now China reducing its growth estimates from 8% (a year ago) down to 7.6% and with other experts further lowering estimates to as low as 7.2% present areas of concerns for most macro economist. Given that the US central bank has been reducing its Quantitative Easing (QE) program with an estimate to end shortly, this would reduce a significant amount of capital influx into the capital markets.  Add also increased global geopolitical activity.  All of this added together and if the theory is correct, there is a stage of maturity requiring taking note.

Furthering the events of September 18 until today, we have broken for the first time in 24 months, the 200 MA of the 720 chart as shown below:

ES Oct 10 2014 Channel Down

Notice the channel that has developed since Sep 18 SHORT and also the increasing volume in the down channel with prices down that has exceeded the bottom of the channel with speed.

Volatility is increasing making options trading an attractive vehicle.

Prices stand now at the 1890 support level (1893) in the daily charts while down move is just beginning to reach oversold conditions, meaning there is further room for selling.

Note – The information in this article is both private and for informational purposes only.  No advice or recommendation is given even if the language may suggest so.

Hot News

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This appeared in the News today that is of great precedence.

  • Russia ratifies Economic Union and readies trade in currencies other than dollar

A new era of trade done primarily outside the dollar, and in national currencies such as the Yuan and Euro. This Union already has the support of several BRICS nations, as well as associate countries, and will help facilitate trade being done in a much smoother and easier way than what is currently used through SWIFT or other Western banking processes

  • China will use gold and gold pricing to force global currency reset

China is recognizing that physical gold is the ultimate catalyst to force an end to the [control] d… of purely fiat finance, and that by revaluing gold to its rightful price will have the effect of both protecting their own currency, and wresting financial control away from the … dollar hegemony.

Europe Economic Update – October 2012

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The EU Zone flash composite PMI misses it estimate and falls to 45.8 to a 40-month low. Flash manufacturing PMI falls from 46.1 to 45.3, below expectation.  Service sector rises from 46.1 to 46.2 a very marginal – if any – rise, also below expectation.

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Germany’s manufacturing PMI fell from 47.4 to 45.7, much worse than expectated.  Services also remain rather unchanged services but with a slight fall from 49.7 to 49.3, also below expectation. On the other side, France’s manufacturing PMI rises from 42.7 to 43.5, but also below expectation.  Services rises from 45.0 to 46.2, better than expectation.

 

Financial & Banking Comparizons USA and China Today!

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The U.S. Banking System Today
As of October 2012, the status of the banking system in the USA is the result of events from 5 years ago.
In 2007, the U.S. banking system (and the European banking system also), experienced a major “shortage” in lending, in part due to the lack of banks balance sheets stemming from the sub-prime lending problems. Banks were considered high risk and their risk premiums increased dramatically due to the lack of safety margins and uncertainties of which banks would fail (or would require a government bailout, which meant privatization resulting in the equivalent as investors losing their investment). All this banking crisis resulting from many banks having issued large of quantities of loans of inferior qualities to high risk debtors – marginal and low income borrowers.
The phenomena that built up the crisis culminating in the bursting starting in September 2007, was an unordinary increase in real estate prices in the USA which kept rising higher to bubble proportions. Loans made by banks in the form of real estate mortgages have been made based on ever higher valuations of the underlying real estate collateral. In an attempt to slow the inflationary bubble, the Federal Reserve raised interest rates, making it more difficult to borrow additional funds and to service adjustable rate mortgages. Consequently, more homeowners/real estate speculators have defaulted on their loans and the values of the underlying collaterals have dropped substantially in many locations. Bankruptcies went on the rise, eliminating job and a negative spiral started on more loan defaults and more bankruptcies, more jobs lost, more loan defaults. Then Fed action to pump back the moribund economy and attempt to prevent further defaults by lowering and maintaining interest rates low to historical proportions.
China Banking and Economics Today
China felt the effect of the US financial crisis of 2007-2009 as consumer demand slowed reducing imports from China. China responded with monetary stimulus of large proportion and lowered interest rates in addition allowing for individual to purchase multiple real estate units when before it was limited to the population. Real estate prices have increased to great proportions and the central bank in China reduced liquidity, increased interest rates and restricted loans in order to cool the inflationary pressures in real estate and other natural resource areas.
While bankruptcies and loss of jobs also occurred, the difference in China compared to the USA is that a large percentage of the population is less dependent on loans and there is much cushion in savings at all levels, personal and government. There still exists close to 60 trillion of personal investable assets and government federal and government owned enterprises also have vast cash and asset in reserves to cushion a crisis.

World Economic Update from China’s Perspective

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Watching China’s export number can shine some light on the rest of the developed world status.

Export to European Union in September remains very weak, down 10.7% compared with a year ago. Export to the United States increased by 5% yoy.  In the Mean time, import from Australia is down 18% yoy.

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Source: General Administration of Customs

The trade data for September are better than expected from China’s perspective with export growth on the upside.

The contraction in export from China to Europe is moderating, however export to the rest of the developed world remains relatively weak in general. On the import side, import growth has been below export for the best part of the year, and including September.  This number indicates somewhat the weakness of internal demand. This consistent weakness of domestic demand also shows that trade surplus is 39% higher than the same period of last year.

Comparing Trade Data With Lending and Financing Data

The slight increase in export activity can be analyzed taking into consideraton lending data.

The People’s Bank of China, China Central Bank, published it’s lending and financing data for September.  In general, bank loans are down 13% but other sources of financing is up 33%.

Total total financing for September increased 33% from RMB1.2407 trillion in August to RMB1.65 trillion in September.

Net new RMB Bank loans amounted to RMB623.2 billion in September, down 13% from RMB703.9 billion in August, and below the original September estimate of RMB700 billion.

However, while RMB bank loans growth appears weak, other sources of fund has added to the bank loans to maintain the money supply considerably higher, as seen in the chart below.  These other source s of financing are: corporate bonds, undiscounted bankers’ acceptances, and trust loans (which is part of the shadow banking system).

In particular, financing from trust loans for September increased from RMB118 billion in August to RMB202.4 billion.

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In particular, financing from trust loans for September increased from RMB118 billion in August to RMB202.4 billion, an 82% increase.  Trust loans are higher yield loans and mostly from shadow (non-licensed) banks.  Trust loans were 12.2% of the total aggregate financing for September.

 It appears as if banks are not incentivated to lend and businesses have to resort to higher yield financing sources.

USA Solved It’s Main Problem – At a Cost

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 This is good for many especially President Obama who is running for re-election.  In 2006, unseen to the naked eye, the USA was heading into a substantial disaster.  The Trade Inbalance with the outside world including oil but all imports combined.  The 2009 Financial Crisis may have been bad for some but it has temporarily solved a bit problem, the Trade Imbalance is reduced by 1/2 (excluding oil) and we even can consider that the trend is now reversed.

From the chart below, we can see that the USA has been running an increasing trade deficit for the best part of the last decade, right until the crisis when global trade collapsed. Deficit widened as the economy recovers, but it is no where near the pre-crisis level.

imageSource: BEA

More important in this chart, is that if oil is excluded from the trade balance, US trade deficit is now only half of the pre-crisis peak. Non-oil trade deficit started declining back in 2006 when it hit the rate of about US$43 billion a month. Currently, US trade deficit is roughly US$21 billion a month, if you exclude oil – that’s a 50%  change for the better of the USA.

So this makes the USA be in a more stable favorable economic situation.  At what cost, middle class and savers have been practically reduced by the same amount.  The rich got richer and the poor became bigger in numbers.  The government with the big corporations also became a lot bigger and stronger.  All in all, it was a smart move.  Sacrifice the people so that the country can live.  Long live the United States of America!

The next step is to reduce the IOU’s from foreigners.  That will happen after 2014 when inflation takes a natural toll in reducing the relative value of the IOU’s.  For example, since the USA owes about $ 4 Trillion, an inflation of 20% would make the relative value of the IOU down by that percentage.  And increasing taxes will have a double gain because the higher percentage of taxes will be on higher employment salaries that have been increased by inflated labor from inflation.  So the balance sheet of the USA is great and the bankers who financed all this are all even happier.

As a matter of fact, if this trend continues, there may not be need for more or bigger wars.  Inflation is an invisible force and nobody will be to be blamed.

Baltic Index Update – Oct 2012

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The Baltic Dry Index (BDI) which measure shipping activity, has rebounded this week on hopes that central bank intervention in China and elsewhere will spur economic growth.  The BDI is a good forecasting tool for the economy since shipping is an inelastic business (it takes months if not years to increase the supply of ships) and the decision to ship is largely a major financial decision with large transaction cost.  Not one that can be made without serious thinking.  (thus is a reliable measure of financial commitment over a medium term – 3 weeks to 2 months).

The BDI measures the costs of shipping iron ore, coal, grains and other so-called dry-bulk commodities commonly associated with industrial growth amongst other sea shipping activities. With stocks rallying but global economies sagging, the index has tumbled more than 56 percent in 2012, falling at one point in 31 straight trading sessions.

(http://stockcharts.com

But the BDI has rallied about 14 percent this week and more than 4 percent Friday alone — a move that coincided with last week’s Federal Reserve QE+ move and general aggressiveness from central banks around the world.

“It’s perhaps responding to the Chinese threats to create more stimulus in the economy and build another empty city in the country,” said Michael Pento, an economist and founder of Pento Portfolio Strategies. (http://www.pentoport.com/pentonomics.php)

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