As we warned in our January 3rd post titled “it’s scary but time has come to invest in equities and short the Japanese Yen “ the conditions were ripe for a significant rebound after the bloodbath of the last three weeks of December.
Indeed, global equity markets rose sharply last week, adding 3 % on average with Asia rising by 4.06 %
Asia had been giving clear signs of relative outperformance over the past few weeks and it is only normal that it took the lead upwards last week. The best performing stock markets were the Hang Seng Index rising by almost 6 % and Chinese H-shares that rose by close to 5 %.
Our Model Portfolio being heavily exposed to Asia and China rose +5.31 % last week, for a 2019 Year-to-Date Performance of +6.86 %.
Last week’s rally in equities built on an extremely depressed sentiment and was triggered by good news on the US China Trade War front as the US delegation was greeted by China’s Chief Negotiator and Minister of Commerce Liu He and the two days negotiations were extended for a third day.
There is a clear sense that Donald Trump has finally realized that he could not afford the US$ 5 trillion equity rout of the 4th quarter to continue and that a quick deal is needed. Apple’s CEO Tim Cook warning that Apple’s sales would be 10 % lower than expected by analysts because of a sharp slowdown of sales in China was a stark remainder that the Chinese feel unjustly attacked by the US and are privileging non-US products, as we predicted as early as February.
Donald Trump must move swiftly and better the relationship with China extremely quickly if he does not want American corporation to lose their presence in the world’s largest consumer market.
Likewise, China needs to move on with its economic transition and counter the slowdown that it is currently going through and that has been made worse by the Trade War.
For the first time in 20 years, less cars were sold in China than the previous years and for the first time since 2016, Chinese corporate profits did not grow in November. Last month’s economic data showed a mild contraction in industrial production and a continued expansion in consumption, but the macro dynamics are still on a downtrend.
The uncertainties created by the Trade War and the 30 % fall in Chinese equities last year have clearly kept the Chinese from spending and the stimulative measures implemented by the Government have not yet fed into the economy. Last week, the PBOC lowered the bank’s Reserve Requirement ratio by 1 %, freeing significant lending power but it will probably take until April-June before the economy regains momentum.
We expect another set of good news on the Trade Front next week and the approval of a draft accord before the end of the month.
Interestingly, and as we advocated all along, the Chinese Yuan had its strongest two weeks in years appreciating to 7.84 last week, a major development considering the fact that Chinese rates fell over the period.
As we have argued all along, China’s Trade Surplus is structural in nature and due to an artificial undervaluation of the Chinese currency, engineered by the non-recycling of its surpluses into its local currency.
Nothing, and certainly not tariffs, will contain China’s Trade Surplus with America apart form a substantial, appreciation of the Chinese Yuan.
Both parties know that full well, but China was waiting for the transition from export to consumption be more advanced to allow it to happen, and when it faced Donald trump’s trade War in February, in let its currency fall to counter the effects of the tariffs.
However, we may have reached the stage where China has no options anymore and will accept to let its currency appreciate.
An interesting development of the past two weeks is that several annual meetings of the regional committees of the Communist Party has been rescheduled from November, December and January to February 2019.
This is extremely unusual and could indicate that a major structural policy change may be in the making, needing approval of the local committees before announcement.
There is also certainly an internal fight with the Communist party on how to handle the US Trade War between the traditionalists, more hawkish approach, and the progressive wing, keener to strike a deal with the US and open up China.
The next two months should be extremely interesting for Chinese Assets.
Government Shut Down
On a completely different spectrum, the Great America has had its Government shut down for 21 days now, the longest shutdown in its history with a President that is demonstrating once again that his beliefs and electoral promises are more important than the opinion of the majority of the representative of the people and that he has no consideration whatsoever for the collateral damages of his bullying tactics.
Indeed, a Government shutdown does not stop the country in the short term but it will have lasting effects in the long term.
Resorting to the State of Emergency and to the US Army to fund and build a wall on America’s Southern border says much about the decline of America and its inability to rule the world anymore.
Donald Trump’s Presidency will have been an extraordinary accelerator of the decline of America and the leadership transition in favor of China. No one expected it would happen that fast.
Brexit’s last step towards the abyss
On Tuesday, the British law makers will have to contemplate the choice between an imperfect deal with the EU or a nasty divorce with significant economic consequences.
A hard BREXIT is estimated to cost the UK circa 10 % of GDP and significant losses of jobs and industries in the future.
There is no more political haggling to be had and the Law Makers are now alone in their choice for the future of the UK.
We are convinced they will ultimately adopt the May plan and chose the safest option.
Although we played the rebound well and we are confident about the upside for China and Asia, we remain cautious for the USA, Japan and Europe going into the next 6 weeks.
Indeed, we are not convinced that the December low was the ultimate low of the first leg of the bear market yet. In our post titled A MAJOR SELL SIGNAL WAS TRIGGERED, we made the case that the fall in US equities would be sharper and more damaging than we initially expected.
As our readers know, we had been predicting the peak in equity markets in 2018 and we have started a typical A-B-C cyclical bear market in US equities in September 2018.
An extremely interesting analysis made by the celebrated technical analyst Justin Marmis focused on plotting all the cyclical bear markets of the past century in the US in one fitted single chart.
His conclusions show that they all have a similar pattern that corresponds to the various stages of psychology of investors.
If one is to concur with his analyses, we are now in the very early stage of the US cyclical bear market which has started in September 2018, and within that A leg, what we saw in December very early January was simply the “Panic” Stage.
We just made the rebound form that stage and we expect to trade at these levels for a few weeks, probably until the end of January, before starting the last leg down, the “discouragement “ phase where we should record new lows on the Dow Jones, the SP500 and the Nasdaq.
This phase will probably unfold over February and March before we start a multi-week Bear Market Rally – Phase B of the A-B-C Bear Market – sometimes in April, for a peak in June – July of 2019.
2019 will be a trading year with a lot of volatility and the completion of the full bear market either at the end of 2019 or at the beginning of 2020.
Agile management and discipline will be required.
Our Model Portfolio
Almost all out positions delivered strong advances last week with Microbot Medical rising by 36 %, Air China, Tsing Tao Breweries, Brilliance and GuangZhou Automobiles delivering double digit performances and Honda Motor rising by almost 10 %. In the US, Ali Baba rose by 8.8 % and Western Digital rose by 7.7 %.
During the week, we took some trading profits on our HSCEI Leveraged ETF and averaged down in our position in TONGDA GROUP. We are getting multiple and significant BUY signals on a variety of Chinese individual stocks that we hold, something that usually indicate a change of trend ahead and the beginning of a bull phase.
We took advantage of the strength of the technology sector to initiate new short position in NETFLIX and ADOBE and we started building short positions in the SP500 as a global hedge for our portfolio.
We also shorted Bitcoins again after its rebound from the 3’500 level.