Asia overnight weak but most sub 1% falls. However, the big story was the Shanghi that collapsed over night by over 3% and making a very bearish chart now. Amazingly many industrial metal issues have not collapsed this am inc Rio, Anglo etc. I have sold down on the few copper related issues i held. China’s copper demand has been stronger of late given some restocking having depleted reserves prior to this. The reaction in China was more significant than other Asian markets inc HK as China is already very weak with her data worsening. Many analysts fear a recession and hard landing in China. On this basis i would reduce exposure to industrial related stocks ex oil as oil has a rather special dynamic related to peak oil e.g. PetroChina – even as the Chinese index falls 3% PTR unchanged). The Aud fx implications are trickier. If Chinese demand falls over for industrial metals then there could be a significant impact to the Australian housing market that may demand rates fall not rise. This would be disasterous for the AUD from these elevated levels. The Shanghi is confirming the worst so on this basis i have to listen to this signal and dilute a little in the coming months – no fast moves yet as this will take a while to feed through but watching and ready to act on losing some Auds. Near term on Shanghi there is a support at 2656. I don’t believe it will break due to the support from the western markets as below hence no fast moves on the yielding AUD however i do expect her to under perform as growth stalls or slows in China. (Of course if the western markets do fall through their supports then we will be off to races and this would be very bearish for the Shanghi and Aud alike. For the moment the western indexes are technically strong).
http://www.stocktiming.com/Shanghai_Daily_Stock_Market_Updates/shanghai-index-update-friday.htm
Down grade aside, the Euro story looks to be resolved, short to medium term, for the moment by the core adding much more debt through the EFSF and fiscal union now being agreed by Europe. The French love the deal of course (the last communist state in Europe) with Sarkozy calling it the formation of a ‘european monetary fund and Europe ‘preparing for economic
integration”. He is correct that this is the implication of what has been agreed. Whether the rest of Europe agrees to this is yet to be seen.
The baton moves to the US debt deal now. As an aside the markets are dominated by government and central bank news flow. Only this is important now it seems. This makes for very choppy and difficult trading markets. Imo the US will do a deal on raising her debts. In spite of the headline ‘cuts’ they will be delayed and be relative cuts to rising inflation rather than real nominal cuts. Much like the ‘austerity’ budget of the UK’s. Her nominal budgets have risen considerably. Her deficits for 2011/12 (in her austerity year) are over 10% of gdp. This is the type of fiscal austerity we will also get from the US on a sustained basis, imo. I.e. year on year eye watering deficits and as far as the eye can see. Who will buy the debt? The western banking system who are in this game now with the governments for good.
Indexes wise. Some near term weakness due to the concerns on US debt extension and then a rally would be the path of least resistance. China should benefit from this and not break her lows but remain relatively weak, imo with a knock on effect on the industrial stocks. Earnings have been strong again and even forward lookings have been ok. European earninsg weaker than US.
FX wise, dollar index remains very weak and technically is wanting to score new lows. The eurusd is very tricky as so many cross currents of news flow at present. I maintain a fairly asset neutral position at present. Generally the news flow is all very supportive of pms and im super bullish precious metals and their miners which show relative value, imo.
Oil, given the actions in the market re increasing supply i find oil relatively very strong. This is partly monetary and partly peak oil related imo.An excellent detailed look from Reuters last week inc the IEA stores news:
The Chinese continue to build stores. They are happy to play with the copper stores but i don’t believe they will ‘play’ with their oil storage facilities. They increase these yoy just as the western oil stores decline.The same can be seen in western agri stores vs chinese agri stores. The same can also clearly be seen in western fiscal positions vs chinese fiscal postion. Chinese reserves continue to grow month on month, yoy and are currently 3.2trn USDs and remember this does not include the hard asset reserves like oil, copper, iron ore etc that China builds yoy.
http://english.peopledaily.com.cn/90001/90778/90859/7437338.html
Summary for equities etc is path of least resistance to the upside post the US ‘debt ceiling’ deal being done. Near term chop and possible downside moves to test a few levels but aside from this higher rather than lower. DX supporting this. Pms much higher, energy hard to call a 5 usd range around 100usds most likely for the next few weeks and then a test of the channel support, as per prior charts. This is subject to Saudis and no negative surprises from Opec. Driving season ending within weeks which should provide some downward pressure pre the gulf storm season towards that 88 level – nymex. In the longer term, IEA projecting $150 usd oil for 2012 as of last week subject to economic growth issues. US and Euro land suspending the releases from their strategic stores. 60mb did precisely zero to reduce oil prices. IEA report and Reuters comment here:
Much more to say but out of time. Rich
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