China nears the “Death Cross”

Asian markets have been flashing red today over concerns about further large declines in the Chinese stock market and uncertainty over the outcome of the release of the Fed minutes and US inflation data.

China
Source: Bloomberg

The Shanghai Composite has continued to decline today, falling 5% at one point, although this has been pared back to a 3% decline. The China Securities Finance Corporation (CSFC) announced that it would no longer conduct daily operations in order to prop up the stock market. However, after great confusion last week over the People’s Bank of China’s (PBoC) “one-off” devaluation on Monday, the exact implications of this statement are yet to be seen.

The Shanghai Composite (SHCOMP) has broken below its 200-day moving average which has been a key rallying point for the market (the authorities?) over the past couple of weeks. Given China’s drastic interventions in the market since June, it would be highly unlikely for the government to let the index plummet. The other interesting technical feature of the index is the 50-day moving average continues to get closer to the 200-day moving average – bringing into play the “death cross”. If the government is tiring of its intervention measures and the market is continuing sideways around a 4000 level, the “death cross” could be particularly significant.

The fall in the Chinese stock market put concerns over the China’s growth back in the forefront of Japanese investors’ minds. The Nikkei 225 fell almost a full 1% in tandem with the SHCOMP’s decline, before similarly paring this back to 0.7%.

The prospects of further declines in the Chinese stock market and further devaluation of the CNY would hit Japanese companies on a myriad of fronts: less Chinese tourists, weakened Chinese purchasing power, and increasing Chinese export competitiveness.

The JPY/USD has largely traded sideways, with it being down 0.07% in three days – largely unchanged. Japanese investors in particular will be paying close attention to the Federal Open Market Committee (FOMC) minutes and inflation data out tonight with the yen, along with most Asian currencies, likely to see further weakness on solid core inflation numbers and positive noises on the economy from the minutes.

The ASX

The ASX has been a lonely island of calm as red raged around Asian markets today. After taking a hammering in recent sessions, the energy sector is up by 2.5%, leading the index as oil prices failed to break to new lows over concerns about the Chinese stock market. The banks have also had a much better day up 1.9%, after CBA saw a massive decline in its stock price after it went ex-dividend yesterday.

With energy prices continuing to hit record new lows, the market was expecting some pretty low numbers from Woodside (WPL). Woodside’s underlying profit fell 39% from last year to US$679 million, however this was above expectations of US$649 million. This has impacted Woodside’s perception as a yield play, with its dividend being cut to US$0.66 from US$1.11 last year. Compared to other competitors, Woodside’s gearing of only 20%, long-term LNG contracts, and continued strong cash flows put it in a much better position to profit from the cyclical downturn in the energy market. Investors will be keeping an eye out for further acquisitions on the back of their purchase of a number of Apache’s assets. Their shares have now bounced 2.1%, after closing at $32.05 yesterday - their lowest level since July 2012.

Treasury Wine Estates (TWE) came out with a strong earnings beat today, and their shares have rallied 14%. EBIT was A$225 million, much higher than expectations of A$213 million. TWE has been boosted by the weak Aussie dollar driving strong growth in the America and Asia. Most impressive was its 36% growth in Greater China, from increased sales growth and routes-to-market. The dire effects of Xi Jinping’s corruption crackdown on parts of the luxury market may be starting to ebb, but TWE’s premium product offering may also have benefitted by being slightly cheaper and less associated with graft than well-known French brands such as Chateau Lafite and Chateau Margaux.

Seek’s (SEK) stock price has been hit hard today, down 11.3%. Despite FY15 earnings coming in largely in line with estimates, their forecasts for FY16 are much lower than expected. Seek had previously flagged that there needed to be “aggressive re-investment across the Group”, and they are planning to invest in new products and customer acquisition in their overseas markets. Seek saw 43% revenue growth from its Chinese business, Zhaopin, off the back of continued AUD weakness. However, these excellent profits could be at risk from any further CNY devaluation.

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