Tuesday, August 4, 2015

Shanghai Index Has Our Attention and Bond Traders are Watching



There have been a lot of eyes focused on the happenings in China and grave concerns have been voiced on the viability for its equity market that many consider rigged.  We share those concerns, but are also willing to allow guidance from technical conditions and common sense guide. 


From our understanding in discussions with locals within China following developments there, retail sales have held up rather well despite the decline in equity prices that arguably caught many first time Chinese investors buying into the later stages of the last and faltered advance.  It has been said that as a generalization, Chinese are fairly well comfortable in dealing with risk ( my interest in stereotyping is limited to its perception influence in markets).  This then would suggest to some they do not run away from this market on weakness. 


I continue to expect the objective of 4528 on the Shanghai Index following the close of a bearish window from July 7-8 (one session from the July 9 low).  See ‘Shanghai Readies for an Additional 22% Advance’ for further).  Note the indecisive trade of Friday and Monday and the recovering price action today.  Note too some similar trading from back in March before the Shanghai rallied over 39% over the 33 sessions.  A repeat is clearly a possibility. 

 


Finally, if I am correct in my expectations that the Shanghai index advances smartly from current levels, I would offer further that widely held views on risk would also shift and there would be less interest, all else equal, in owning Treasuries and more interest in owning commodities.  As such, I see reason some would consider long positions in FXI (Equity), YINN (Equity), NUGT (Equity) and otherwise short Treasuries and Eurodollars.  There is 2 days and more position adjustments to be made between here and the Payroll report on Friday.  For now, it looks like more ‘risk-on’ and pricing a greater likelihood that the Fed takes its first steps toward ‘normalizing’ policy rates in September.  


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