China digging in on trade - We are Reducing International Stocks
Comment of the Day

June 05 2019

Commentary by Eoin Treacy

China digging in on trade - We are Reducing International Stocks

This note from Rodd Smith for Riverfront may be of interest to subscribers. Here is a section:

Eoin Treacy's view

Here is a link to the full report and here is a section from it: 

From a fundamental perspective, economic data is softening all over the world as uncertainty over global trade is causing both consumers and businesses to reduce spending. This is especially true in Europe and Japan, which the major public companies are very sensitive to demand from China d the US.

Fundamental uncertainty is reflected in global stocks (as measured by the MSCI World Stock Index, which has broken below the 200-day moving average. The 1s quarter of this year saw the Index recoup all of the losses from the 4th quarter and return to the highs of last September. Until the trade talks soured, it looked like the Index might make it above the September high, but now it has broken below support at the bottom of our indicated decision box, (blue horizontal lines, chart below), suggesting the recent weakness could persist. We think the next support for global stocks is around 480 (dotted line, chart below).

The best time to use moving averages as stops is when we have evidence of a year consistent trend where the price has bounced successively from the trend mean. Nevertheless, a moving average is a trend smoothing device that lags by definition and markets often overshoot so it is reckless to think of the moving average as a sacrosanct level

The MSCI World has been ranging below its early 2018 peak, with the 525 area offering a secondary area of resistance. Conclusive top formation completion would be confirmed if the price drops below the moving average on a sustained basis and subsequently encounters resistance at it on a rebound.

Yesterday’s rebound on global markets suggests a low of at least near-term significance and upside follow through over the balance of the week will confirm how many investors have availed themselves of buying opportunity during this dip.

I wrote a couple of weeks ago that it was not a time for new money. That argument is not as convincing today with the Federal Reserve potentially readying the market for further easing.

Europe in particular stands to benefit as the Dollar eases while Japan is likely to be negatively influenced by the Yen if it continues to strengthen.

This conclusion is dependent on the ECB revisiting its QE program which is on hiatus at the moment. There is no question that Europe is sandwiched between the USA and China on the trade front and is in need of assistance, the uncertainty is how long that is going to take to register with the ECB as Mario Draghi’s term comes to an end.


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