08/12/2014 – Calling the start of the USD/HKD peg defense!

Go for dinner, come back, see that the Hong Kong Monetary Authority bought HK$60 million of US dollars in the open markets and then dumped that in the closing aggregate balances of the banking system. Together with a US$ rate in Hong Kong dollars at 7.751 (1% of the total bandwidth away from the upper band of the HK$ value relative the US dollar) when the euro, Australian dollar, cable, and commodities across the board are falling while Chinese stocks outperform the world, I think it’s safe to say that the peg defense of the HK$ by the Hong Kong Monetary Authority started today.

This will start providing Hong Kong with an early Christmas present in terms of more liquidity in the banking system, and as short-term rates are generally going up, it seems like there is demand for cash for investment purposes as well, so this liquidity will probably be used very, very quickly. It will definitely be interesting to follow up on as the month progresses, and an early Merry Christmas to all you traders or investors out there holding long Hong Kong positions! Institutional traders kicked off the week by getting rid of liquidity as well for investment purposes, putting themselves just a bit above HK$75.7 billion in total HKMA liquidity used and putting the 75B line under attack for the week to come. Overall HKMA liquidity increased, so banks got a lot more Exchange Fund Bills and Notes to hold overnight, so these interest rates going up might come in handy!

As a small and sour cherry on top, there’s the increase in cash circulating through the economy. This is obviously bigger than any other factor, but it being December and retail picking up means that more cash will be needed to fuel the shopping of the season, so I wouldn’t put too much thought into that. HK$2 billion is still nothing to sneeze at – even though I am having a cold at the moment! – and it could be a good indicator of how holiday season shopping is progressing so it’ll be worth keeping an eye on.

Until that data becomes clearer, we have a peg defense! Ready the champagne and go long!

Daily data deluge, 08/12/2014 – Impressions from the East

Today was very much a day to be surprised of the data released, or the way the data was weighted and traded.

Here’s a good opening into my own analysis style and ideas, so sit down and enjoy this in the cold December weather. First order of business, what was the released data?

• Japanese Current Account for October: 833 billion yen vs. expectations of 366 billion yen, but lower than the September data.
• Japanese bank lending: up 2.8% in November in YoY terms, up from 2.4% in October (which also set the expectations). Bank lending is accelerating, and this is the highest increase in bank lending since early 2009! (And that data has serious base effects thanks to the financial crisis.)
• On the Japanese GDP side, there was a mixed bag. GDP proved to be rather static to the initial estimate, even though investment and capex had shot higher, and external demand and private consumption were higher than expectations.
• Chinese trade balance data came in at US$54.5 billion, which I count as a major disappointment thanks to import numbers that were not as good as I would have expected.

In Japan, it is very much now a question of whether fast-moving indicators and leading indicators are going in the right direction, and how rough it will be to fight against static forces or lagging indicators. The current account blowout will probably happen in December’s data, and I was wrong for “jumping the gun” on this, when we still have November data to look forwards to. This data should provide more money in the Japanese economy than is otherwise expected, and the analyst expectation of 366 billion yen proves that there is a lot more money to go around.

Still, money in Japan has never, really been the issue. The issue has been people piling the money into mattresses or the even worse idea of putting it in the bank for no interest, or companies simply stacking bills or government bonds on top of each other. Bank lending data for November accelerating 0.4% more than in October indicates that lending really got underway in November. If we count the 2.4% level as a baseline (reasonable assumption given that prior months of data have fallen around here) and that the 0.4% gain is attributable to November alone, we get some really interesting interpretations. Let’s just round it to easy numbers since these changes are small enough. 2.4%/12 = 0.2%. The baseline MoM growth in lending is slightly, slightly lower than 0.2%. However, if we have eleven months of 0.2% growth, and then one month that tops everything up to a total of 2.8%, then that month must have been having growth of more than 0.57%, or an annualized growth in excess of 7%! Bank lending in Japan probably won’t grow that fast in the future (one can dream) but the overall style of reporting the numbers masks a rather massive shift, going from 2.4% to 2.8% in this calculation rather than from 2.4% to 7%!

I have still not gotten a good idea of why the GDP numbers came in so incredibly low given other factors, but these numbers are troubling.

For the day’s really big reporting SNAFU on financial wires there’s the Chinese trade balance data, so please see my take on this data, the analysis surrounding it, and my forecast, after the jump.

Battle of the bumblers, 07/12/2014 – Japanese markets shot higher too!

To continue my recap of the last week, here’s the added information of the Japanese markets.

The title comes from one stupid index construction – due to price-weighting – used as a bench mark (the Nikkei 225) going higher than another (the Dow Jones Industrial Average) for the first time in a very long time! Depending on how you count it this happened during the late Asian hours on Thursday (when the Nikkei futures traded higher than the DJIA closing price) or on the respective time on Friday when the US employment data had a much bigger effect on Nikkei futures than on the DJIA, thanks to the yen push factor and better expectations of increased exports from Japan to the US.

On top of this, Abe Shinzo will look to go into the second and last week of election campaigning this week, against a still completely disoriented opposition. He will go into this on Monday with GDP revision numbers coming out, with Bloomberg forecasts of a Q3 revision to -0.6% from a -1.6% headline numbers. Bank lending and current account numbers will all be out at the same time tomorrow morning (08:50 Japan Standard Time, or 23:50 today, GMT) 40 minutes before the Japanese markets open. I’ll go over a bit more of what the markets might see in terms of data before the election, after I give you a technical outlook on the Japanese markets in general.

Nikkei 225:

Nikkei Stock Average, 4-hour candles, futures-implied spot, chart courtesy of CMC Markets.

Here, we have a strong momentum play from the last steep trend line, looking to replicate the latter half of October’s trading in terms of points on that parallel line, and a “match” would imply that the rest of the week will hold positive momentum. As I have argued previously, I do think the market will be in wait a bit more for the election, waiting to take positions until after the dust has settled on and markets have opened on Monday December 15th, but the 48/120 hour EMAs plus breaking the upwards trend channel and holding it for more than 8 hours (which is a first!) will undoubtedly provide more momentum. “Following the line” would set an end-week price of roughly 19 000, so that would be interesting to see if it plays out.

If 12 hours pass of neutral trading, then the 48 hour EMA and the trend line will really start lending support to price, so this could be interesting to watch. Then, will we get any help from elsewhere?

USD/JPY:

USD/JPY, 4 hour candles, chart courtesy of CMC Markets.

The Nikkei does have some catching up to do against the dollar after the employment numbers came out! There’s nearly a 1.5% reaction to the effect of the employment numbers, plus bouncing off the trend channel top, and getting support by the 48 hour EMA. Momentum indicators on the bottom are also indicating strong momentum, but the distance to the established price action is so far that there is the possibility of giving away the majority of those gains again. I also personally believe that the 121.85 level will prove very difficult to cross, given that the other Fibonacci levels from the 2002-2004 USD/JPY downwards move have proven very resilient. If this is broken though, it sets up tests at peaks near 124.14, and 125.60. Given the previous market action around these levels giving initial breaks that are retreated on, a break should probably only be called after 24 hours of continuous trading above the 121.85 line.

I find this to be difficult to support, as good as the US employment data might have been, I think the best that will happen is a quick break above that gets reversed, unless the majority of a Japanese trading day trades price higher after crossing.

Time for looking at what data Japan will look into next week then! This, as always, after the jump!

Record rallies, 07/12/2014 – China week-end action

Chinese markets were really, really active all last week, with the Shanghai Composite alone racking up much more than RMB2 trillion (no error there!) in total turnover, with much more icing on the cake. Here’s the big results of Friday’s feeding frenzy across China and Hong Kong markets:

• Hang Seng Index:
  • Spot high-low-close-return: 24 171 / 23 773 / 24 003 / +0.71%
  • Futures-implied spot HLC: 24 209 / 23 753 / 24 087
  • Turnover, at HK$147.8 billion, is the highest it has been in almost seven years.
    • Think about that. It’s higher than the AIA float. Higher than the ABC float. Higher than the Chow Tai Fook float. Sure, the general opening of the Chinese stock indices to the world is a Continuing Global Offering… but the frenzy is getting incredibly big. The only higher volume periods on the HSI are from the late-2007 peaks, when the stock index was going from ~26 000 to ~32 000 in a month.
  • Implied volatility from the VHSI up 4.41% to 17.03.
  • Trading that paced from gains to losses and back to gains again afterwards with violent spikes either way. This was generally a theme for all stock indices under watch, to be honest.
• Hang Seng China Enterprises Index:
  • Spot high-low-close-return: 11 761 /  11 413 / 11 600 / +1.04%
  • Futures-implied spot HLC: 11 771 / 11 414 / 11 615
  • Turnover massive at HK$50.84 billion, only beaten by one day in early 2013 for the past six and a half years.
• Shanghai Composite:
  • Spot high-low-close-return: 2 978 / 2 813 / 2 938 / +1.32%
  • Shanghai A-Shares Top 50 HLCR: 9 906 / 9 292 /  9 675 / +2.10%
  • Record-breaking turnover of RMB639.19 billion, which added to the more than RMB400 billion trade on the Shenzhen Stock Exchange, meant that the total Chinese market turnover, on Friday alone, exceeded RMB 1 trillion.
• Shanghai – Hong Kong Stock Connect:
  • Northbound quota balance use at RMB2.57 billion.
    • This was the result after falling from a high of RMB2.84 billion and fluctuating between increasing and decreasing throughout the day, implying sell orders were active across the link as well.
    • No pattern was seen between movements in the Northbound link and gains/losses in the Shanghai Composite.
  • Southbound quota balance use at RMB1.43 billion.
    • Much faster quota use during the afternoon, save for one block trade sell around 14.30.
• The Kong Kong dollar gained again, closing the week out at 7.75116 to the US$. Monetary base intervention is close now, and has increased marginally throughout the week, and financial institutions are buying in marginally (a few tens of millions HK$ per day) using HKMA liquidity to finance their purchases.

Looking at the longer term, we get very different outcomes between where the different indices positioned themselves over the week. The HSI still has valid technical analysis from the recent past, and we don’t really need to change the outlook significantly, although we do have a volume explosion that could set the index of for a massive move higher should more cash flow into the Hong Kong markets and be doubled into liquidity by the HKMA to blow out money supply and allow stabilization against the US dollar.

The HSCEI is breaking very long-term trends by being above the 11 230 level, but there is still a litany of peaks that have to be overcome, from 11 645 all the way up to 14 500 at close intervals, so the resistance will be thick thick thick, although volumes and monetary base data, together with a very strong China link will prove great stimulants for the index to break the market.

Finally, we have the Chinese mainland stocks, and then particularly its large cap A50 index. This one has literally broken the (daily) charts, and deserves a special, technical look on a weekly candle basis:

Shanghai A-Shares Top 50, weekly candles.

Yes, that wick is Friday’s high-close difference… but it looks like the markets will test the 10 000 – 11 000 range in the coming week. A good thing to look at could be the longer-term past outlooks to find decent peaks to anchor expectations to.

I am getting slightly concerned about these markets rallying this much, but there are a few reasons (not necessarily good ones) to stay bullish, which I will outline below, after the jump.

Festive forecasting, 01/12/2014 – Santa rally coming to town?

Bloomberg put up a rather great summary of where you might want to keep your money during December, given that there’s an expectation of a Santa Rally. This post doesn’t constitute an investment recommendation by any means, but it’s somewhat in the spirit of the CLSA annual forecasts that they do at the start of every Chinese New Year, trying to evaluate how traditional mysticism might influence the stock market and which developments to at least look out for. My mysticism of choice is uncertain statistics, technical analysis and recent trends to get you through the next month and hoping to follow up with the first quarter of 2015 in East Asian markets by providing a little insight and not a single investment idea worth putting money in.

Looking over the Asian markets we have here, there’s Taiwan, South Korea, Japan, Australia and India. India is not a market I am too familiar with, and same thing more or less goes to Australia. This is however compensated for by Hong Kong posting average December gains of 3.7%!

This time I will aim to involve you readers a bit more in the forecasting fun and really hope to hear your expectations for the markets I discuss here. I really appreciate any comments coming my way, and will gladly repost / reblog / feature some people, either by the strength of the discussion you bring out or by how accurate your forecasts are. At the start of the new year, I aim to publish a post with the best forecasts across the markets I track, the best total forecasts by one poster, and honorable mentions for markets I am not looking at within the first week of January. The scoring will run as follows, with the rules being the same as in golf – lowest number wins!

Single forecasts: [ln(prediction/actual)]^2 / [Days to December 31st]^2

Multiple forecasts total: [Sum of Single Forecasts scores] / [N × ln(1 + N/3)]

N = number of forecasts. To qualify for multiple scoring, one needs to provide at least 3 year-end forecasts. Thus the maximum marginal advantage conferred on guessing one more contract is 22% (by offering four predictions rather than three) but those offering ten predictions will get roughly double the leeway on their average accuracy versus those offering only three! Post many forecasts to discuss, but don’t spit out so many that I’d think you threw darts at a board!

The single forecast formula is done to premier early forecasting. It will get easier to guess by a square root of remaining time, so I have to penalize the late forecasts a lot to promote you guys to comment early so that there is something to discuss. The way the formula is currently written means that scoring should get harder by the square root of time. Forecasts today will have a four-times advantage on forecasts given Tuesday December 16th, and 16 times to those forecasts given Wednesday December 24th!

Let’s get started after the jump, so you get this before all the gains are gone!

Taiwanese Tea Time, 30/11/2014 – Election upset

Wow… the ruling Kuomintang (KMT) party, led by Ma Ying-jeou, lost pretty spectacularly and surprisingly in the mayoral elections held here in Taiwan yesterday to the Democratic People’s Party (DPP), led by Tsai Ying-wen. The issue isn’t so much legislative (it wasn’t a parliamentary / general election) but the signal Taiwan sent by making the ruling party lose control of nearly all major cities/municipalities (Taipei to the “independent” DPP-backed People First Party (PFP), and Taichung, Tainan, Kaohsiung to the DPP) was felt throughout like a political earthquake. This led to the PM resigning, and Ma got under the heat of reporters and criticism not long after.

General elections will be held in the start of 2016, giving the KMT roughly 9/8ths of a year to turn public opinion around unless Ma wishes to be forced to cede power to the DPP, and I expect politics to go into overdrive to provide good results to boost the prospects of re-election.

What has brought this about, given that at least Taipei and Taichung have normally been the industrial / corporate base on which the KMT has stood firm as essentially the rest of Taiwan was sided with the DPP? Ma Ying-jeou has lately been called “Mr. 9%” as a reference to both his low approval ratings (9%) and the “jeou” character in his name which means “9” in Chinese, but even despite this he has managed to score political victories, most notably a reelection in 2012. So, what has changed?

• Worries of economic stagnation. Wages are not increasing in Taiwan, while house prices and rents are going up and reaching stratospheric levels compared to average salaries. There has been discussions on lower economic growth proving to be a massive funk for the island which it has yet to get out of, despite GDP growing at roughly 3.5% for the last 6-9 months and showing signs of increasing.
• Fears of China have increased. Partially, this is because a more assertive Xi Jinping has been playing a lot of tones that ring of nationalism which isn’t the best sound in Taiwanese ears, for understandable reasons. Part of it is normal, Asian irrationality and demands for remaining separated and elevated from China by birthright, which are fears that cannot be placated under any circumstance as long as China is growing faster than Taiwan and steadily opening up.
• Heavy-handedness by Ma. He’s been trying to force a lot of regulation through parliament without broad support, looking more like a CEO responding to owners everyone believes to be Chinese, than a politician genuinely looking out for the Taiwanese people and their interests. “Sellout” is a pretty common slur about Ma these days, or that he’s trying to show progress on unpopular decisions towards a schedule set by Beijing, and the protests in March of this year against the Cross-Strait agreement were probably the standout development in this area. On top of this there have been a few food scandals which obviously, in any lack of perfect handling, gets pinned on the ruling party.
• Voter fatigue. How many rulers in democratic countries get a second renewed mandate? Sweden failed this even though the economy’s been good, the same thing with the US in the last midterm elections even though there has been a lot more controversial policy to go around in that case. Then what are the chances for that happening in Taiwan which is gradually becoming less and less competitive (thanks largely to a very tightly managed currency against the US dollar) while asset prices are soaring?

Here’s what I think needs to be done in the coming ~6 months for Ma to maintain his presidency, which I personally do think is beneficial for Taiwan (both on ideological grounds and as a matter of pragmatism – the “greens” as the opposition is known isn’t a group I think of when someone mentions professionalism and organizational capability). As usual, hit the “Continue Reading” for more!

Data dinner, 25/11/2014 – US data avalanche

Not too much is happening right now, so I am getting a quiet-before-the-storm feeling, and a good chance to update the blog here on what the evening and night will bring.

First a quick update:

• Germany GDP: Completely in line with expectations of a 0.1% MoM and 1.2% YoY number, vs. revised data of -0.1% and 1.0% for the prior period.
• French business sentiment was up to 99 from 98, beating expectations of 97.
• Swedish PPI numbers beat prior period PPI’s by 0.45% YoY and 0.43% MoM. This is probably really good since the country has been flirting with deflation under a right-wing government, and looks increasingly likely to dig deeper under a left-wing government.
• Italian retail sales beat prior data to just be significantly less negative.
• None of these have had a huge market impact, although the French business sentiment data started a push higher in the EUR/USD from 1.242 to 1.244 in about 90 minutes.
• In other news, the AUD/USD is testing below 0.854, which it hadn’t seen since 2010 prior to today! It looks like the resource-bearish trade is definitely on and a generally strengthening dollar is also observed elsewhere. The AUD/USD tested 0.852 briefly, and lower commodity prices could easily see the pair test the significant support/resistance at 0.8.

As for the data we have to look forwards to? Hit the jump for more!

Resource roundup, 24/11/2014 – Pre-OPEC preparation

This week looks set to see a lot of volatility, where the earlier part is probably going to be largely driven by equities and Chinese capital markets which might in turn largely be driven by the PBOC. The latter part of the week is then pretty likely to be driven by the result of Thursday’s OPEC meeting in Vienna which Bloomberg has good coverage of. Most interesting is the split in decision forecasts between production maintenance and cuts to shore up prices. The split does right down the middle.  Seeing a lot of volatility here will probably rely a lot on derivatives and options hedging in particular. After all, if you’re well-hedged, then there is probably not a reason to rush for the doors as soon as the market goes against you a bit.

What is more important is the signal: does OPEC show that they’re willing to deal with lower prices and lower profits to maintain market share and relevance, or do they decide that the production cuts that ensures marginal profit is upheld, at the risk of losing geopolitical influence and lowering the petrodollar trade?

It will be difficult to tell either way (as the analysts prove) but the market reaction is at least expected to be spectacular. Let’s look at a bit of a technical view of where the market is currently positioned ahead of any production decision by OPEC on Thursday.

West Texas Intermediate Crude Oil:

West Texas Intermediate, daily chart candles.

PBOC interest rate cut!

When I wrote earlier that there were good technical analysis indications and positive outlooks for next week, I didn’t expect to be nearly this right. Even with the People’s Bank of China providing support as the “managing bank” to the Shanghai Stock Exchange going public to a global audience, I really didn’t expect this out-of-character interest rate cut. (At least provide required reserve ratio cuts before to show that you’re into broader easing? I thought Japan was the reigning champion on monetary policy surprises…)

Information at the moment is scarce, and futures are looking insane, with the HSI futures are up about 1.3% in post-spot-close trading, HSCEI futures are at 2% (!) on the equivalent measures and the Nikkei 225 futures (!) are up 0.5% since the announcement.

Some other analysis and discussion will get postponed to make room for this as the story develops. Sadly my Shanghai – Hong Kong Stock Connect update will a) become close to irrelevant, and b) have to be postponed until lunch tomorrow (China Standard Time) at the earliest given that I have a friend’s birthday celebration to attend to. I will try to make up for this with a separate post on general market expectations now that China has gone to the nuclear option in its monetary policy toolbox.

Further updates will be provided below the “Continue reading” tag, but with time stamps updated here above as to when I got the news and what exactly there is below the tag to read about.

18:45 CST: Realized that futures jumps were due to PBOC news, started writing blog post. [No CR-tag info added here]

19:30 CST: Bloomberg provides some details on the decisions. [Link and discussion.]

20:30 CST: Market reaction summaries. [Indices, commodities, currencies.]

Sour Sushi Sauce, 17/11/2014 – Nikkei 225 market view

The massive hit that the Japanese markets took today is probably best summarized in this return to the Nikkei 225 4-hour candle chart:

Nikkei 225 4-hour chart, monthly window

We’re getting “saved” here by the lower trend, after the GDP data forced a crash below the upper trend line. Not particularly good by any standards, but we’re still not in “horrible crash” territory. The Nikkei turned after touching 17 555, so 17 500 looks like a strong resistance, but we also get pretty strong support / resistance play at 17 100 as the intermediate range between the 17 450 level and the 16 750 level. There are a lot of support structures, so if there are movements that the market see as positive out of Abe’s cabinet, or out of the Nihonbashi headquarters of the BOJ, that should be enough to let the market shrug off the GDP data from a technical perspective.

In the currency markets, the yen is back on its weakening trend, going from around 115.5 to 116.2 to buy a US dollar in the last four hours, and the EUR/JPY bouncing after going below the 145 level. The euro also really doesn’t like its 21-day EMA, and has been rejecting gains above 1.25 as I expected after the European traders got back into the market to their first session of trading for the week. This whole setup should allow for greater levels in the Japanese markets if recent trends and correlations hold up, so even though the bucket of ice that GDP numbers provided to expectations today was indeed tempering any expectations of a northward climb, there are still technical, fundamental and political reasons that hitting the sell orders manically isn’t a surefire trade.

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I will update a bit more later on the Shanghai – Hong Kong Stock Connect opening market action once the HKMA monetary base data is out for the day. Doing any analysis or forecasting without that data is a little bit like flying blind, and this week has enough expected events smattering by that I will want my forecasts to be accurate rather than quick where they can be. Have dinner or something until then and see you back when there is full daily data to bite into!