I don’t know how else to put it into words.
The fiscal cliff was technically passed over, and now there was a can-kicking measure to make sure that we get back here in two months.
And markets rejoiced in infinite exuberance. How do we reconcile something like this (which is essentially a tax hike in the US, which is labeled as a writing of tax decreases into law, but leaves entitlements and any sort of reform to be agreed upon later such that a lame-duck congress can be flushed out and a “live” one be invited in instead) with a market rally in global equities?
Probably by keeping in mind that this continues uncertainty for a while, and for at least the first few months pretty much ties Bernanke’s hands to the ctrl and p buttons. The fiscal cliff was effectively passed over, the debt ceiling is hit, and most likely the Fed has little choice but to print without abandon to reach the $1.5 trillion or so that would be needed to offset the risk of deflation if the equation of exchange model and the velocity of money runs as expected.
So how did this reflect in our much-shortened trading week?
Hong Kong’s Hang Seng Index shot up like a bottle rocket on very high volumes. The 600 point move on Wednesday was followed by pin bars on both Thursday and Friday, both closing above the top-close of Wednesday. Bullish all around, and most likely a reflection of previous money inflows now finding at least the short-term confidence to plow into equities. I would expect this to last throughout January, and I see little resistance before the hit of 23 800. Naturally, sustaining these volumes is pretty much where all the gains will come from, and although I do believe the index to start becoming richly priced around these levels (and thus buying into puts) I see no fundamental reason why the index would not see continued higher volumes given that we have an extraordinarily late Chinese New Year to trade ahead of. I do not consider it outside the realm of possibility to see 25 000 by the 8th of February, but the US political uncertainty plus more than week-long break in China after that does look to make the whole set-up slightly problematic for any significant push to happen after the end of January. The recommendation is to try to go into cash and play that harder after you actually have access to the markets again. Keep an eye on volumes: they averaged over HK$82 billion this short week, and if we see consistent inflows and trades around HK$100 billions that’s basically a key for the market to test 25 000.
In individual stock names, there has been across-the-board rallies. Most to my benefit has been the madness that is HKEx, which has gone up a nice 8.1% on the week! There will be more technical analysis of this name fairly soon, but the 150 level (another 5%) does look like the next stop, and trust me I will show exactly why later.
Chinese banks do look slightly rich technically, but if the push in China remains and there is a continued rally in the Shanghai Composite, I would not be surprised to see another 5-10% for ICBC, and double those levels for names like CCB and BOC.
Casino’s have absolutely been on a roll, with everything from extended Christmas + New Year’s holidays, good growth numbers and the ever-powerful influence of Deutsche Bank (which actually knows how to analyze these stocks) going out and backing the names in full force. 4-5% up on the week and more likely much more to come! Galaxy still my top pick, but if you’re reading this you’re already likely overweight that name, so I would rather take the risk of going into SJM if the total numbers keep going that well and China keeps powering on.
Tencent looks like it will climb out of its little rut that has plagued it for the last seven weeks, and looks set to rally harder after that. There has been good rejections of the half-year moving average so far, and I would not be surprised to see the name around HK$270-280 in the near future.
China was only open for one day, but it looks set to keep pushing higher as well. There was slight hesitation in the market, but the afternoon trade saw the Shanghai Composite return to the green.
What is more interesting is that it’s monthly performance has been 15% and that a fall back into that range was rejected! The next would then be the “bull market definition” area around 2350 (+3.5%) that would be the expectation for where to take smaller profits and wait for consolidation before a quicker leg up. Be alert to the possibility of financial firms leading this rally, or insurers, which have been on a tear as well as of late. (Ping An!)
What I find really interesting here is if there will be any particularly good material plays or derivatives thereof in terms of global miners as China returns to more sustained growth and the new leadership in sworn in. It will be a development to watch for the rest of the year, surely!
The land of the sinking yen is seeing its stocks rally in the same old fashion as it has ever since Abe jumped in. The Nikkei 225 pinged 10 700, which represents a nice 23.2% jump since Noda informed of the election taking place, and 11.1% in US dollar terms. This is, even when adjusted for the now much cheaper yen (touched 88.3 to the dollar, closing at 88.15) makes the Nikkei the clear late-year outperformer. Better yet, the profile (parabolic) of the move makes it look like there is next to no end in sight. Will this finally force the entire chain of differential equations at war in Japan to come crashing down, and send the yen to the USD/JPY 120 range? It will be hard to tell, but all the more intriguing to see it unfold!