Chinese Stocks And The Yuan Giving Signals On A Trade Resolution

February 22, 5:00 pm EST

As the anticipation has grown on a structural reform agreement between the U.S. and China, we’ve talked about what might be the leading indicators that China will make the necessary concessions to get something done.

Remember, by the end of last year, much economic data in China was running at or worse the 2009 levels (the depths of the global economic crisis).  Clearly, they are in trouble.  As for Chinese stocks, an ugly bear market of was triggered in early 2018 when Trump’s rhetoric turned into action.  He slapped tariffs on washing machines and solar panels (a signal of bark and bite).

But as we know, by December the spiraling data in China also began taking a big toll on global markets.  With this, we’ve had responses from global central banks, including in China.

Now, Chinese stocks have been important to watch, for clues on: 1) are they doing enough to stimulate the struggling economy, and 2) (more importantly) are they taking serious steps to get to an agreement on trade with the U.S.?

With the above in mind, Chinese stocks bottomed on January 4th. That was when China and the United States announced they would hold trade talks in Beijing that following week.  That announcement represented the re-opening of trade talks, and the potential of an end to the trade war – which was a welcomed relief signal.

Chinese stocks have since represented an important signal in the recovery in global stocks.  On that note, the Shanghai Composite is now up 15% from the January 4th bottom. So, the signal has been good.  And as you can see in the chart below, we’re trading through the 200 day moving average (the purple line).

Another spot we’ve been watching in my Pro Perspective notes has been China’s currency.

China’s currency (the yuan) ends the week near its strongest levels since July.  This is China’s attempt to show the Trump administration that they are willing to make concessions on the all-important currency (the tool that has driven the massive trade disparity and wealth transfer of the past three decades).

As we head into the weekend, we have these two “leading indicators” supporting what has been maybe the most optimistic tone we’ve heard yet on an agreement.  It was announced this afternoon that the head Chinese trade negotiator would be extending his trip to Washington through the weekend.

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Expect December Data To Recovery Just As Sharply As Stocks Have

February 21, 5:00 pm EST

We’re seeing some more December economic data that reflected the souring of economic sentiment from the sharp decline in stocks.

It started with retail sales last week. Stocks dipped immediately on the bad data, which proved to be a valuable buying opportunity. Today the bad number was December durable goods. These tend to be large investments that reflect optimism and these expenditures become the first to be delayed when that optimism wanes.

But less than two months later, and we have the v-shaped recovery in stocks. Expect this data to bounce back just as sharply.

We continue to get signals that some form of agreement will come from the latest round of U.S./China talks. As we’ve discussed, some of the best signals are in the commodities markets.

Remember, to end last month, we talked about the setup for a big run in commodities this year. Crude oil was up 20% in January. It’s up another 5% already in February. Copper was up 6% in January. It’s up another 4% this month. And copper is the commodity known to be an early indicator of turning points in the economy.

With this in mind, assuming we get resolution on China, and a continuation of trend growth in the U.S., we should expect this commodities rally to be in the early stages. And that should make emerging market stocks among the most attractive on the year. At the moment the MSCI emerging markets index is performing only in-line with the big developed stock markets.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.

The Amazon, Walmart Gap Is Officially Closing

February 18, 5:00 pm EST

We had a big earnings report from Walmart today.

Last summer we talked about the huge divergence in the performance of Amazon (the world’s biggest company by market cap) and Walmart (the world’s biggest company by revenue).

Let’s take another look …

As we discussed, the market was pricing Amazon like a runaway monopoly — killer of all industries, especially retail.  And the perception has been that Walmart was destined to become another rise and fall story of a dominant American retailer.

But there was a clear and new catalyst that entered. Trump had made it very clear that he was, not only looking to balance the playing fieldglobally, but also domestically.  And that meant, the tech giants were due for some regulatory headwinds.  Amazon has been in the crosshairs, and still is.

As such, as I said last summer, this chart below was becoming the proxy for the domestic “rebalancing” — where the foot is being lifted from the jugular of the old economy survivors.

 

 

With today’s big Q4 earnings report from Walmart, we now have this chart.  

As you can see, the jaws have closed, albeit mostly driven by the resurgence of Walmart.  This spread trade was good for about 25% since June.  Amazon was 4.3 times the size of Walmart.  Now its about 2.5 times as big.

And this convergence should continue to have legs, not just because of the pressure from Washington on Amazon, but also because of the competitive moves made by Walmart, that may be finally garnering some respect on Wall Street.

Walmart has been aggressively investing in online. They bought Jet.com in 2016, an American online retailer.  That same year they took a large stake in the number two online retailer in China, JD.com.  Walmart now owns 12% of JD.

JD.com already has a big share of ecommerce in China.  They are number two to Alibaba, but gaining ground due to some clear competitive advantages.  JD owns and controls its logistics infrastructure, and does quality control from the supplier to delivery.  And unlike Alibaba, JD sources product to its warehouses to fight the counterfeit goods risk – a big problem in China. JD has 500+ warehouses around the country, and they now source product and service customers from one of the 433 Walmart stores in China.

So Walmart is positioned well to take advantage of the growth in the middle class in China.  Amazon has yet to find its way in China.  It has about 1% market share.   Add to this, Google came in last year with a $550 million investment to help position JD to challenge Alibaba and Amazon on a global scale.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Key Charts Heading Into The Weekend … Watch Oil, EM

February 15, 5:00 pm EST

Stocks end the week on a strong note.

Let’s take a look at the charts on key global markets as we head into the weekend.

Here’s the chart of the S&P we looked at earlier this week.  U.S. stocks continue to lead the way as the global risk proxy.   

Crude oil closes the week near three-month highs.  This one looks like a run back to the $70s is coming.  Like the last runup from the $40 to the $70s in oil, people are (again) starting to convince themselves that there is a supply glut and that demand somehow isn’t strengthening with global economic growth near the best levels in a decade.  A U.S./China deal is a catalyst for a lift-off in commodity prices, including oil … 

The most important chart is this one…

With the Fed now in a ‘wait and see’ position, we’ve had the most important interest rate market in the world (the U.S. 10-year yield) back off from 3.25% to 2.66%.  With inflation tame and economic data solid, the interest rate market has gone from a headwind to a tailwind (for global risk taking) within just the past six weeks.

That makes this next chart (of Emerging Market stocks) one of the most compelling.  We have a big technical breakout this year, though the EM index has been relatively quiet this week, despite a very strong U.S. stock market.  This may be the chart to watch next week… 
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
December Data Reflects Sentiment Storm, But Sets Up For Downgrades and Positive Surprises

February 14, 5:00 pm EST

A big miss on retail sales this morning sent stocks sharply lower, initially.

This type of reaction presents a perfect opportunity to add at cheaper levels.  Remember, this is old data, from December (delayed due to the government shutdown).  And we know what was going on in December.  Stocks were hammered.  The government was heading toward a shutdown (which happened toward the end of the month).  And the Fed raised rates right into it.  It was a sentiment storm.

What is significantly correlated to sentiment?  Retail sales.

Here’s a look at the dip in both …

 

 
The number this morning has already triggered downgrades in fourth quarter growth estimates.

The good news:  This will also further drive down expectations for Q1 growth.

I say good news, because these sentiment driven indicators have a long history of short-term swings, and can bounce back very quickly.  Remember, since December, we now have a near full retracement in stocks, a Fed on hold (and a  more acommodative global central bank stance), and a somewhat more optimistic geopolitical outlook.

So, we’re setting up for positive surprises in the economic data for Q1.  Positive surprises are fuel for stocks.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Chinese Stocks Signaling Growth, Trade Dispute Is Bottoming

February 13, 5:00 pm EST

Over the past couple of days we’ve looked at some key technical levels for stocks, as we continue this V-shaped recovery from the deep decline of December.

We now sit just a percent and a half off of the December 3rd highs. And today, we get a break and a close above the 200-day moving average in the S&P 500.

So, with all of the doom and gloom scenarios we heard as we entered 2019, a month later and we’ve nearly fully recovered the losses of December.  And with expectations on earnings  and growth all ratcheted down now for the year, we have a lot of fuel for much higher stocks.

As U.S. stocks go, so do global stocks.  We looked at the chart on Japanese stocks yesterday.  We did indeed get a big technical break overnight of the correction downtrend that started in October of last year.

So, today we have this chart … 

With much of the concern on global growth directed squarely in China, this chart of Chinese stocks is signaling that perhaps Chinese growth is bottoming, and maybe because a U.S./China deal is coming.  

In this chart above, you can see this bear market in Chinese stocks last year was started in January.  That was when Trump rhetoric on a China trade war turned into action.  He slapped tariffs on washing machines and solar panels (a signal of bark and bite).  Now we have a bottom, as of last month, and a big technical break of the downtrend, arguably leading the patterns we’re seeing in U.S. and Japanese stocks.  For how you can play it:  Here are some ETFs that track Chinese stocks.

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
The Chart To Watch Is Japanese Stocks

February 12, 5:00 pm EST

Yesterday we talked about the big trend break in the S&P 500 and the big 200-day moving average hurdle, above.  Today we closed right on that 200-day moving average.

Here’s an update of the chart …

 

 

With this momentum, the chart tonight to watch is in Japan.  Here’s a look at Japanese stocks.  

As you can see, U.S. stocks have broken the downtrend of the past quarter, but Japanese stocks have yet to follow.  The Nikkei remains 15% off of the highs of October.  But with the strength in U.S. stocks today, we may get the breakout in Japanese stocks tonight, ahead of Japanese Q4 GDP (which is due tomorrow night). These are some ETFs that track the Nikkei. We own DBJP in my Forbes Billionaire’s Portfolio, an ETF that tracks the dollar-denominated Nikkei.  

Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Watching Chinese Stocks For Clues On A Trade Deal

February 9, 5:00 pm EST

It’s a fairly light data week this week.  And we’re in the final stretch of Q4 earnings season, which has been good, despite a bad stock market for the quarter.

As for stocks, after a very huge bounce back in January, February has been flat.

But we’re working on this chart … 

As you can see, the S&P 500 has broken out of the downtrend that started October 3rd, but has failed (thus far) at the 200-day moving average (the purple line).  That 2,742 level is a key area to overcome for a return back to the levels of December 3.  That would complete this V-shaped recovery (about 3.5% higher than current levels).

Mnuchin and Lighthizer are in China this week.  So we’ll get more information on the U.S./China trade front.  However, it now looks like the March 1 trade truce deadline will be pushed back.  And maybe the whole thing culminates with a meeting between Trump and Xi at Mar-A-Lago next month.

Perhaps a good signal, after the holiday week in China for the Lunar New Year, Chinese stocks opened the week strong.  The index that tracks smaller cap stocks and higher risk tech names jumped 3.5%, for the biggest two day gain since early October.  Broad stocks in China are now up 9% from the January lows.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
Sitting On Big Levels For Interest Rate Markets

February 8, 5:00 pm EST

Let’s take a look at some key charts as we end the week.

As we discussed yesterday, we had growth downgrades from Europe this week, and it was driven by the worst case scenarios of a no-deal on Brexit, and/or a continued stalemate/no deal on U.S. China trade.

Let’s see how that’s being interpreted in the key global interest rate markets.

First, we should acknowledge that the big swing in global economic sentiment was driven by the optimism surrounding the 2016 elections (i.e. a pro-growth U.S. President).

That gave us a sharp rise in global interest rates, and a sharp rise in global stock markets.  But now some of the air has been taken out of the optimism-balloon, and some big levels are being tested.

First, here’s a look at the U.S. 10-year yield.  On election night the 10-year was trading around 1.75%.  It has traded as high as 3.25% since.  But now we have this big line representing the rise from election night …

 

 

The 2.55% area is a big area for U.S. rates.

And in Germany, the German 10-year yield has returned to pre-Trump levels this week. 
After a decade of global QE, loads of global fiscal stimulus and countless backstops/intervention, lending your money to the German government for 10 years (the strongest economy in the euro zone) will pay you 9 basis points a year.
So, the interest rate market sits on critical levels heading into next week.
While a lot of attention by global politicians has been given to U.S. policy, this should be a clear signal to eurozone politicians to stop relying on the ECB, and to take some aggressive action to stimulate the economy (i.e. fiscal stimulus and structural reform).
Still, the move in rates looks well overdone.  Probably a good time to sell bonds – looking for rates to move higher from here.
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
2019 Looks A Lot Like 2016

February 7, 5:00 pm EST

Downgrades on growth today weighed on global markets.

First, the European Commission slashed growth expectations for 2019 for all the major euro economies. For the EU overall, they are looking for 1.3% growth, versus 1.9% a few months ago.

Next up was the Bank of England decision on rates this morning.  They left rates unchanged, but downgraded growth for ’19 and ’20.  Keep in mind, this all incorporates the reset of expectations on global interest rates that have taken place over the past month (i.e. acommodative and staying that way).

So, why the downgrades? It’s all driven by fears of the worst case scenario on Brexit and U.S./China trade negotations.  That worst case scenario would be “no deal.”

Importantly, if we get these deals, the upgrades will come, quickly.

For the moment, though, we’re continuing to see an environment that looks much like 2016.  Central banks responded to the crash in oil prices by resetting expectations on monetary policy (easier).  And then the growth downgrades followed.

By the end of 2016, the U.S. election had swung sentiment from pessimism to optimism, and the growth upgrades came in — the Fed actually raised rates before the year-end.

I suspect if the fog of uncertainty clears, we will see the same.  But in the meantime, promoting the worst case scenario for growth may get policymakers in Europe motivated to follow the lead of the U.S. with some needed fiscal stimulus.  That would be good for European and global growth.

 
Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.