China: Red Flag Rising

Written by Bruce J. Clark

April, 22, 2019

Despite a blistering start to 2019, there’s a growing popular narrative that the equity markets are just getting warmed up and stocks are on the verge of a “melt-up” in prices. Even Larry Fink, CEO of the world’s largest asset management firm BlackRock says so. (https://reut.rs/2Pq3ISJ) Who are we to argue?

Respectfully, I’d be very careful before jumping on that bandwagon. Market price action always reveals a change in trend well before it becomes otherwise obvious and it makes its way into the financial press. Some signs are subtle and others are not, but they’re always there if you look for them. A couple of tell-tale red flags have popped up in the past few days that are worth paying attention to. Mr. Fink might be correct in the long run but right here I think his view represents a bad bet.

Stocks are up big so far this year in most regions of the world due to more plentiful liquidity and easier financial conditions courtesy of the major central banks, especially the Fed and the People’s Bank of China. Those policies appear to be producing green shoots. Good numbers last week for US retail sales, trade and jobless claims alongside indications that China is stabilizing is certainly encouraging.

But don’t confuse the economy with the market. As I say in (Good news, bad news ), the downside of better economic performance means potentially tighter monetary policy from the Fed than is currently priced in. It also likely means a stronger US dollar. Both outcomes pose risks to equity and commodity sectors that have become addicted to easy liquidity.
(Beware the dollar)

Last Thursday the S&P traced out one of the more distinctive and predictive chart patterns; a key reversal. China’s benchmark Shenzen CSI 300 did the same just yesterday (after mainland property sector stocks got hammered on talk that authorities may pull back on credit due to the improving economy. (https://reut.rs/2viCGDP) Of course these patterns aren’t infallible signs of a turn but when both of the world’s bull market leaders throw up the same cautionary flag, only a fool would ignore them.

Author: Bruce J. Clark

Bruce Clark is a thirty-five year veteran of the financial markets, both as a trader and as a journalist. After a career as a principal and proprietary trading manager for some of the world's largest banks, he began writing about markets for Thomson Reuters in 2012 as a senior financial market analyst, working out of the New York and Washington, DC bureaus. He is presently a Washington, DC-based editor for MT Newswires and a special contributor to ConnectedtoIndia and The Capital.

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