China and Australia are major trade partners. Australia is resource rich and a major exporter of raw materials like iron ore and copper. China is a big importer of raw materials to fuel its tremendous growth. Recently, Chinese economy is not firing on all cylinders. The slow-down in China is dampening Australian economy too.
China – Is That The Ogre Of Deflation?
China’s annual consumer price index hit a five-year low in January. the National Bureau of Statistics reported that the price of goods and services purchased by consumers increased by +0.8% in January from a year ago. The expectations were for an increase of +1.1% compared to last month’s reading of 1.5%.
This is the weakest CPI reading since November 2009. The trend since late-2013 has been down too, which means it may decline more.
In January, the producers price index declined by -4.3% from a year ago. The forecast was for a decline of -3.7% and previous month’s reading was -3.3%. The factory deflation is worst in nearly three years.
These numbers underscore the worsening economic conditions and put pressure on policymakers to inject more stimulus into the economy. Market expects People’s Bank of China to cut interest rates around March and April. On February 4, 2015, the central bank announced a reduction in the bank reserve requirement for the first time in over two years. Also, in November, PBOC surprised the market by cutting the benchmark interest rates for the first time in more than two years.
On Friday February 13, China announced that its economy extended 1.47 trillion yuan ($235.6 billion) in new loans in January. The forecast was for 1.355 trillion yuan compared to 697 billion in December. This is the highest level that the new loans have reached in five and half years.
The broad M2 money supply grew by 10.8% year-on-year, missing the expectations of 12.1%. Expansion in credit is good for the economy and expanding M2 is inflationary, something that the Chinese economy needs now.
On Friday February 13, the Shanghai Composite Index closed at 3203.83. For the week it gained +4.2%. Its gain for 3-month period is +29.2% and for 52-week period +51.4%.
On monthly timeframe the benchmark index is near a resistance zone.
The first resistance level is created by the August 2009 high of 3478.01. The second level is formed by the 38.2% Fibonacci retracement of the sharp decline from the high of 61.24.04 made in October 2007 to the November 2008 low of 1678.96.
In September 2014, Shanghai Composite broke above a down-trend line extending from the 2009 high. In November it broke above the 60-month moving average.
On daily timeframe the index is bouncing off after testing the low made in mid-January. It has also reclaimed the 50-Day moving average. Based upon the current price action, there is a higher probability that the index will test the high made in January than the low made in February.
The relative strength of the Shanghai Composite versus the S&P 500 is strong too. The ratio of Shanghai Composite Index and S&P 500 is on a uptrend since July 2014, which means that the Chinese benchmark is outperforming the U.S. benchmark. It faltered at the beginning of 2015, when the S&P 500 took the leadership position.
However, the uptrend is probably re-establishing. The ratio is finding a support near the 50-Day moving average and the RSI is bouncing off the oversold limit of 30.
There are nearly 100 Chinese companies trading on the U.S. exchanges as ADRs. Not all of them are doing well and most of them are quite volatile. Some of these Chinese ADRs that are either outperforming the SPY or showing some promise are: Cheetah Mobile (CMCM), China Distance Education (DL), China Digital TV Holding (STV), China Life Insurance (LFC), NetEase (NTES), China Telecom (CHA).
Australia – Economy Is Not a Happy Camper But Equity Market Is
Australia had few jobs related economic report during the second week of February.
First was the ANZ Jobs Advertisement report, which tracks the change in the number of jobs advertised in major daily newspapers. It was up, +1.3% for January, for the eight straight month. This is an sign that the labor market is perhaps stabilizing. The annual trend is also nicely sloping up.
Next was the Australian Bureau of Statistics’ employment change and unemployment rate report.
For the month of January, Australia reported an unemployment rate of 6.4%, which was worse than the forecast of 6.2% and last month’s rate of 6.1%. The unemployment rate is at a 12-year high.
The total employment count for January declined by -12.2K. The forecast was for a decline of -4.7K. Last month the employment count increased by 42.3K. The number of full-time jobs declined by 28.1K and part-time employment increased by 15.9K.
The jobs report underscore the reasons for RBA’s surprise rate cut earlier in February. Now, the market is putting a 60% chance of a further rate cut in March and over 90% chance in April. The market is also expecting with high probability that the rate would hit 1.75 percent by the end of this year from the current level of 2.25 percent.
On Tuesday February 10, National Australia Bank Limited released NAB Business Confidence for the month of January. At a reading of +3, the level was better than last month but the trend is not rising, rather it is just hovering over zero.
This is a leading indicator of economic health. It is based upon a survey of about 350 businesses regarding the relative level of current business conditions. A reading above zero indicates improving conditions and below zero indicates worsening conditions.
The Westpac Consumer Sentiment for the month of January came at 8.0% compared to last month’s reading of 2.4%. This is a survey of about 1,200 consumers and asks respondents to rate the relative level of past and future economic conditions, employment, and climate for major purchases. It is a leading indicator of consumer spending. It soared based upon the surprise rate cut, declining crude oil prices and rising equity markets.
On Tuesday, the Australian Bureau of Statistics (ABS) announce fourth quarter’s HPI – change in the selling price of homes in the nations’ eight state capitals – rose 1.9% from previous quarter versus a forecast of 2.0%.
On an annual basis, the HPI shows a slight down turn for the last three-quarters.
Next day, ABS announced a +2.7% increase in the number of new loans granted for owner-occupied homes for the month of December from prior month. The expectation was for an increase of +2.3% and previous month’s reading was -0.4%. On year-over-year change basis, the recent trend has been down. This reports indicates an uptick.
These two reports paint a mixed-picture for the housing sector.
The Australian dollar has been on a strong downtrend versus U.S. dollar. But there may be a floor in sight.
On monthly timeframe, Aussie is at a support zone. One support level is at the 61.8% Fibonacci retracement of the rally from 2008 low of 0.6076 to the 2011 high of 1.1080.
The second level is at the lows of 0.8067 made in 2010. Aussie has broken below this number but the pair is still within the zone to stage a bounce off.
On daily timeframe, Aussie did not decline much this week despite bad economic data. Its weekly decline was only -0.4%. It is in the process of consolidation.
If Aussie does not break below the lows made on February 3, 2015 and instead breaks above 0.7900 then it may bounce towards 0.82 level.
AUD/JPY is a good barometer of the risk-off / risk-on trade-off. Japanese central bank is on a quantitative easing program, which is weakening the yen and should give an up-thrust to the pair. And, if there is a higher demand for Australian dollar – meaning Aussie economy is doing better – than the pair should rise too.
However, the pair has declined for the past couple of months highlighting the weakness of Australian economy.
Now, it is at a long-term uptrend support, which also coincides with the high of 2011. The high acted as a resistance level before it was broken in 2013. Since then it has turned into a support.
For this pair to rise, two things need to happen. One the Bank Of Japan should continue to give indications that it is either persisting with the QE or increasing. Second, the Chinese economy need to improve, which in turn is dependent upon easing of monetary policies by the People’s Bank of China.
Equities Are Having A Good Time
Sydney’s S&P/ASX 200 index, however, is doing quite well. On Friday February 13, it closed at 5877.50, for a weekly gain of +1.0%. Its gain over a 3-month period is a healthy +7.8%. And, over 52-week period it gained +9.7%
On monthly time frame, the chart of Sydney’s benchmark index is almost the mirror opposite of its currency. After bottoming in 2009, S&P/ASX 200 is rising in an upward sloping channel and is between 61.8% and 78.6% Fibonacci retracement of the sharp decline from 2007 high of 6851 to the 2009 low of 3296. The second resistance is made by the May 2008 high of 5980. A break above that will open up the possibility of it reaching the 2007 high.
On daily timeframe, the S&P/ASX is making a bullish pattern. In mid-December, it made a double-bottom. In late-January it completed the pattern by closing above the intermediate high of two lows of double-bottom. The measured target of the pattern is near 5954, which is near the resistance levels mentioned in the monthly timeframe analysis above.
The index has also broken out of a horizontal channel. The first touch on the upper limit was made in August. the lower limit is formed by the double bottom. The measured target of this pattern is near 61.66, which is 5.00% away from the current level.
However, a rising S&P/ASX 200 index does not offer good opportunities to trade in U.S. dollar on States side.
EWA, the Australia iShares ETF, has been greatly underperforming SPY, mostly due to the weakening Australian dollar versus the U.S dollar.
EWA / SPY ratio was in a downtrend since early 2014. Near the end of the year, it changed the trend when EWA started to outperform SPY. The ratio has broken above the 50-Day moving average. For EWA to continue to outperform SPY, the Aussie dollar has to stop its slide and S&P/ASX needs to keep up it current trend.
There are fewer than ten Australian companies trading on U.S. exchanges as ADRs. These are mainly in mining, bio-tech and banking industries. Some are too small. Here are three which show some promise of outperforming the SPY. BHP Biliton (BHP, Genetic Technologies (GENE), Westpac Banking (WBK).