So… are we off to the races yet? The HSI is up 1.6% and the HSCEI is up by a whopping 2.3%! Whoa! What happened? (Sorry for the early “Continue reading”, but there’s an A4 of bullet point list right here, so I’d rather save you the scrolling if you’re looking for something else.)
- Parts of it are obviously the 14-day repo worth RMB20 billion that flew under most people’s radar, signaling that China is now going in with short-term flexible liquidity again, and that a small prop-up of the market is likely needed…
- The 800-pound gorilla of today’s developments was the positive remarks on the Shanghai free trade zone, indicating that the project can now be expanded after only about 13 months in existence. Xi Jinping is working hard to maintain a firm grip of Deng Xiaoping’s mantle. Saying with confidence that the first stone of free trade opening has been felt after just one year, and that further steps in crossing the river can be undertaken is really impressive, possibly even more so than the opening of Hukou reform that was reported on last month.
- Coming off the heels of the Fourth Plenum makes this even more impressive. Xi probably got good reasons to have greater confidence in his ability to drive the Chinese economy and society last Thursday. More official communiques are still eagerly awaited at the S3 desks…
- A lot of the ground work seems to have been done with a RMB200 billion injection by the PBOC. Yes, this is worth reiterating, as liquidity in the financial system seems to be supported at all stages. The question is – just what will this liquidity be needed for? What types of reform would benefit from this, I wonder?
- Also in the Bloomberg article above, industrial data out of China was pretty great, showing that Xi has a cushion for further developments. Industrial profits, most notably, were up. Again, good stuff, profits need to circulate throughout the Chinese economy to add equity financing to the investments that have so far been pushed up by debt. Velocity of money goes up, this enforces liquidity further, helping allocate funds to companies deserving it. Thus these companies see their market capitalization growing, allowing easier investments by large funds, which has an easier time collecting and investing money if the markets are highly liquid!
- Talking up shares ahead of a HK-SH Stock Connect opening probably serves a separate purpose as well. That on top of China thus “borrowing” liquidity from abroad to the tune of up to US$3.8 billion per day, or RMB23.5 billion. Again, gradualism is the name of the game, and running with added liquidity and corporate governance which could push up valuations in Shanghai thus perpetuating more liquidity is a network of positive developments.
What happened technically on the HSI then?
You saw yesterday’s HSI analysis so I hope you have that relatively fresh in mind. The chart is also updated so please look there if you want the normal chart patterns. Basically, we did a complete reversal of fortunes here – the SMA’s were springboarded off of, ADX/DMI components took another swing around each other and the RSI felt an incredible attraction to the 50 level. Now we’re knocking at the 23 500 – 23 700 range again! Volume spiked above the 20 SMA with a HK$67.7 billion reading, indicating that there might be more to this push than given by the candlestick alone.
All futures markets are essentially in bullish territory from the East Asian daylight trade, and more easing does seem to be the name of the game globally.
The reason to temper expectations is this:
This chart basically says that there is little-to-no “surf” ability here as the Bollinger is crimping down on price. Coupled with the earlier-mentioned resistances from candlesticks and intermediary peaks / troughs spread around the 23 500 – 23 700 range on top of the 126 SMA, this feels like an uphill battle and a half. I have to admit that I have been too pessimistic looking into this data, and given today’s analysis of the HSI in a monetary base-perspective, projections below 22 000 seem unrealistic unless money flows out of the Hong Kong dollar.
The market turnaround can be pretty abrupt here: the 21 SMA will start flaring upwards from here on Thursday (assuming price stays around 23 500) and only falling if the HSI closes Friday below 22 900. Given that the 63 SMA is around 24 200 still, that would be the minimum target for next week if we can extend today’s positive ADX/DMI cross. That turning into a negative cross is probably the only thing I can think of at the moment that would significantly force a re-evaluation of the technical picture and a flat-to-down market between here and November 7th.