Shanghai Index trend consolidation
Let the collateral damage begin now that the Phase 1 trade deal between China and the US has been signed. The headline is a pledge by China to purchase an additional US$200 billion ($269.2 billion) of US farm products and other goods and services over two years. The deal includes a US$50 billion increase for US agricultural products.
China has indicated that this will come from existing orders and not result in an overall increase in China's agricultural imports. In simple terms, the American win comes at the expense of the share of agriculture exports from other countries. That calls for a readjustment of investment in foreign agricultural companies and logistic chains.
The same collateral damage is evident in other sectors where China is supposed to buy an additional US$50 billion in US services, US$75 billion in manufacturing goods, and US$50 billion more of energy supplies.
The deal, signed by President Trump and the lowest ranked of the Chinese Vice-Premiers, Liu He, leads to cancelled planned US tariffs on Chinese-made cell-phones, toys and laptop computers and halved the tariff rate to 7.5% on about US$120 billion worth of other Chinese goods, including flat panel televisions.
But it retains a 25% tariff on a US$250 billion array of Chinese industrial goods and components used by US manufacturers. China's retaliatory tariffs on over US$100 billion in US goods also remain in place.
The deal does not end tariffs on American farm exports and it also makes farmers increasingly reliant on Chinese state-controlled purchases to meet the import targets. This provides a future pressure-point.
China made some additional commitments on intellectual property, currency and market access, but did not budge on some of the biggest sources of tension in the trading relationship between the countries, such as Beijing’s industrial subsidies. These are to be addressed in a Phase 2 discussion.
In a largely symbolic win, China is no longer labelled a currency manipulator.
Like many deals brokered by President Trump there seems to be a lot of huff and puff followed by very little change but with unintended collateral damage for erstwhile friends and allies.
For investors in Australia, the US-China deal is part of a double whammy. First is the increase in US agricultural exports to China comes at the expense of many Australian agricultural exports.
That comes on top of the impact of the extensive fires in Australia’s Eastern States. These are the prime agricultural and tourist areas. With air quality in several Australian cities rated as the worst in the world, and extensive coverage of smoke shrouded cities and international athletes gasping and collapsing, Australia’s image as clean and green is under significant threat.
The clean and green mantra underpins Australia’s agricultural exports and is a large part of its tourism attraction message, particularly along the East coast where fire damage has been at its worst. Investors may need to adjust their exposure to Australian investments impacted by this double whammy.
The Phase 1 signing provides a welcome temporary relief but its not a clear-cut victory. Unlike the US markets, the China market did not respond with overwhelming enthusiasm.
Technical outlook for the Shanghai market
The Shanghai Index is consolidating near the long-term resistance level at 3,120. This level acted as a resistance point in March 2019. It was a support area in 2018. The index briefly moved above 3,120 and has now pulled back which suggests the 3,120 level is a significant resistance point.
A breakout above this level has a longer-term target with a retest of the previous highs near 3,280.
The Shanghai Index has developed a trend with stable trend characteristics. The consolidation and minor retreat behaviour is not a threat to the underlying trend. Any pullback is treated as an entry opportunity for a continuation of the uptrend. The index has been clustered along the upper edge of the short-term Guppy Multiple Moving Average (GMMA) but is developing the potential to test the lower edge of the short term GMMA as a support feature.
Three chart features define this uptrend continuation. The first feature is the uptrend line. The trend line starts from the low of 2,857 on Dec 3, 2019. The trend line has a second anchor point on Dec 12. This is followed by a series of confirmation anchor points that hug the trend line from Dec 24 to Dec 30. This is the line that will be used to define the long-term uptrend.
The current retreat will further test the trend line as a support feature. A successful rebound form this support area is very bullish.
The second chart feature is the breakout above the long-term resistance level near 3,040. This was a resistance feature defining the fivemonth sideways trading pattern. This is a long-term support level for any major dip in the uptrend.
The third feature is the GMMA relationships. The long-term GMMA is well separated. This shows good investor support for the developing trend.
The short-term GMMA is also well separated. This separation provides good support for any temporary pullback in the Index. It provides support for the current consolidation activity. This is a bullish condition with steady separation between the longand short-term groups of averages.
The lower edge of the short-term GMMA is near to the value of the trend line. Additionally, the upper edge of the long- term GMMA is near to the resistance support level at 3,040. These features provide more support features for the developing uptrend.
The anticipated consolidation near 3,120 is followed by a temporary retreat. This is an attractive entry point for many investors so there is a good probability of a strong rebound and a continuation of the uptrend.