‘Stability’ is working

China almost crossed the line back into the black yesterday and expectations are that the Shanghai and Shenzhen markets will actually register positive prints today. It’s a bold call but one I think will be proven right.

Source: Bloomberg

It would be remiss to not to point out how much China drove trade yesterday.

Chinese futures plunged at 11.15am AEST on the open, which spooked Asian markets almost immediately.

On the open of the cash markets, however, everything rallied. Japan, Southeast Asia, Australia, Hong Kong and mainland China rallied from 11.30am onwards and did so all the way to the final hour of Chinese trading.

Call it what you will; the aptly named ‘rescue squad’ have made their intentions clear and will continue to support the Chinese markets at any cost.

Yes, the Chinese indices closed down but strength is seen in the 200-day moving average and further investigations into Monday’s price plunge will limit major downswings for the next few weeks.

I have been asking myself this question recently: what effect have the last two months of equity market trade had on the Chinese economy and consumer? The economy is yet to release its retrospective information (August will illustrate how the markets affected the economy) but Chinese consumer numbers are out.

So, is the equity crash having an effect on Chinese consumers? In short, no. The loss of wealth from the collapse of the markets is not hitting the majority of Chinese wealth. Chinese household saving rates are currently the highest in the world at 40%. Its nearest rival is Luxembourg at a touch over 10%. The China stock market crash is an interesting situation but the net effect on the Chinese people looks minimal at this point.

What else is spiking my interest

US earnings season kicked back into gear – Twitter is the likely standout on the open with a huge beat on the EPS line. The same can be said for Gilead Science. The hepatitis drug maker has certainly justified the market excitement it has seen in the past six-to-twelve months and may see solid buying on the open tomorrow. 

However, there is a growing sense the US bull market is out of breath. The six-and-a-half-year Bull Run in the US is showing signs of fatigue. Here’s why:

  • Only 34% of US stocks are above their 200-day moving average.
  • Only 54% of stocks are above their 50-day average this year, compared to 64% in 2014 and 73% in 2013 (yes, the momentum has been slowing for two years).
  • Healthcare and consumer discretionary sectors account for all gains in the S&P this year; every other sector is in the red.
  • The transport sector is trading at its largest discount to the market in two years.
  • 57% of S&P companies are in a correction (contracted 10% or more).
  • 460 stocks on the NYSE are at 52-week lows.
  • Yet the S&P is up over 3% year-to-date.

Iron ore is now bouncing. $53.45 is the highest level in almost a month. However, both Brazil and Australia have cut export volumes in July as maintenance at terminals kicks in. The longer-term outlook shows the taps will be turned back on once July maintenance filters out. I see iron ore averaging US$50 tonne for the remainder of the year.

Ahead of the Australian open

The bounce in the equites and commodities markets overnight should give a pretty positive lead to markets. However, the jump in iron ore was foreshadowed in the Dalian futures market yesterday and the jump in miners may be slightly muted as it might have been priced in yesterday.

There is an interesting pattern emerging in the ASX, having seen the ASX breaking out of the downtrend from the April top to the June low. The top of the channel has been defended three times in the past week and looks to be a new support level.

This is despite the issues facing China and the weak leads from the States. 5550 sees a reasonable amount of buying support and the ASX will cross back into 5600 points today, meaning July will be the first positive trading month for the ASX since February as it would be hard for the market to fall over 150 points in the next two days.

Ahead of the open, the ASX is pointing down 43 points to 5628.

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