· The recent PBOC and government stimulus measures have helped China shares and the CNY
· There are some interesting trendlines to watch in key indices that may signal further gains
· CNY gains are worth watching – a vote of confidence in some ways, but not that helpful in other ways
At Tricio we look at charts in order to gauge investment sentiment. The recent moves by the People’s Bank of China and government to offer stimulus (see our blog ‘China offers stimulus’) has been taken well by the stock markets and currency so far. Will this last? We think it is the start of a turn in sentiment, but it may take some time and further measures. However, we did raise our China equity asset allocation to ‘neutral’ a few months ago after being ‘underweight’ ever since we started Tricio in early 2020, so this is encouraging!
We take a look at some weekly charts of key indices, and ETF that tracks big Chinese shares, and the currency below. If you have any questions please don’t hesitate to contact us at info@tricio-advisors.com.
The chart below is the MSCI China index. The index tracks China A, B, H, Red and P chips and foreign listings. It has over 655 members and is in USD. The13-week moving average crossed above the 50-week moving average just before the summer and an important falling resistance line is at hand. These lines can mark supply and demand pressures, and a sustained break above this blue line would suggest that demand is outpacing supply, so share prices are rising (and may rise further). The big target would be above 180 (simple extension) with the red line near 200 marking a potentially really important barrier to overcome for those who are really bullish (old lows, gap). Watch the 50-week moving average as support (just below 120) ahead of the 100/95 key lows from earlier this year and 2022, respectively.
The chart below is the CSI 300 (biggest shares by market cap on the Shanghai and Shenzhen stock exchanges, in CNY). It is interesting to note that the 13-week moving average has yet to cross above the 50-week moving average in this index. When it does happen (if?) this should be seen as a step in confirming a potential reversal of fortune here. Falling line resistance near 3,535 is worth watching as well if this can be regained on a sustained basis. The early summer high near 3,700 will serve as a big level to regain after this, with the big focus on the 4,530 area high from the recovery attempt in July 2022. The recent lows are very important to hold in this index.
The chart below is the Hang Seng Index, which can be seen as a bit of an ‘old school’ way to look at China shares as it is a market cap (free-float adjusted, in HKD) index composed of the biggest 82 shares listed in HK. The 13-week moving average is above the 50-week moving average which is supportive, and it looks like an important falling resistance line is giving way. It will be important to build on this break, and not reverse it, if market sentiment is really improving. The falling blue line from the 2018/2021 peaks is a big upside level to aim for (long-term bulls!) with the flat red line near 27,000 key below this. Use the 2024 lows as support to hold on big drops, with the 18,000 zone serving as a pivot area above this.
The chart below is the iShares Large Cap UCITS ETF (GBP) as a proxy for China funds (others are available!). The ETF tracks the FTSE China 50 Index so it sort of tracks the HSI, but as the chart shows, it is actually a bit different. Watch the falling line resistance that is near 6,500 as a potential bull breakout confirmation level. The red line near 8,900 serves as a big barrier (and target) to watch after this. Holding above the recent low near 5480 will be important for bullish sentiment, as slippage below this would suggest that investors are giving up on near-term gains and the early 2024 lows would be at risk of being tested.
On the currency side of the sentiment story, the moves this week by the PBOC and government have bolstered the CNY. Keep in mind that the currency is a managed basket. Still, the move from 7.35 probes to eyeing 7 again is worth noting as the USD is being pressed on the chart below. A strong CNY could be seen as a vote of confidence for China, but a weaker CNY would probably help a China recovery story a bit more. Inflation is too low (disinflation is threatening to turn into sustained deflation) and exporters never complain about a softer currency. See if the 7 area proves sticky and if the managed float is worked back to 7.3 or even weaker.
It may help to look at the JPY cross rate (chart below). The soft JPY took the cross from near Y15 in mid-2020 to over Y22 this year. While China and Japan may not compete directly in every economic sector, the soft JPY has been a regional concern for a few years now. As the JPY has reversed vs. the USD since July, it has firmed vs. the CNY as well. It will be interesting to see if the current CNY gains vs. the USD run out of puff and the CNY returns to 7.35 and even weaker vs. the USD, which could help the JPY cross drop further to Y19, and then return to the Y17.50 and lower area. At the moment though the risk is that the CNY firms through 7 against the USD to 6.8 or even 6.6 which would bolster the CNY vs. the JPY once again.
Gerry Celaya
Chief Strategist
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