(Nov 18): The only feature that can be relied upon in the US-led trade war with China is that US President Donald Trump cannot be relied upon. Anything tweeted can be untweeted and that makes for a difficult investment ride. Both the Dow Jones Industrial Average and the Shanghai market reacted strongly to the on-again, off-again comments last week about tariffs.
Investors like stability, and even traders prefer volatility that is predictable rather than chaotic. These features are absent from global markets and that adds risk to long-term investments. This is reflected in the rise in the gold price and reallocation of capital flows.
The alternative to the chaos inflicted by the White House is the stability of China’s Belt and Road Initiative (BRI). Its features were on show at the China International Import Expo in Shanghai and at the BRICs meeting in Brazil. Stability is attractive for investors and even more so it if offers opportunities to move into emerging growth markets. Although there is no single instrument that can be traded, these markets offer individual investment opportunities that can be easily reached through a variety of exchange-traded funds.
The choice between stability and volatility can also be made closer to home as the regional trade environment changes. A few weeks ago, I delivered a keynote at the Global Knowledge Economy conference in Qingdao and had the opportunity to listen to a speaker who described the work done on Indonesia’s National Single Window (INSW) customs clearance programmes. This is a paperless cross-border trade system and replaces a cumbersome, time-consuming and corruption-friendly process that relied on multiple bits of paper spread across multiple official desks, a process that has been the bane of exporters for decades.
You may wonder what on earth INSW has to do with China, BRI and Singapore. The answer is also the answer as to why countries in our region must be involved in the BRI. This is not about missed infrastructure building opportunities. This is about the very mechanisms of trade within our region.
The INSW is compatible with BRI cross-border transactions and trade procedures. It is promoted as a template for how not just Indonesia can move forward, but how other paper-plagued trade partners can also move forward and simplify their customs systems. This is a solution not just for Indonesia, but a template recommended for others within Asean. This is the template that is most likely to be taken up by most of the member states that signed up to the Regional Comprehensive Economic Partnership trade agreement in Bangkok in early November.
The take-up of this BRI-compatible programme among our trading neighbours impacts on every Asean country that Singapore trades with. The BRI influence on the mechanisms and regulatory structure of trade is not just limited to China and China trade.
Investors need to be alert to these structural changes in the cross-border trade environment. They are designed to build a stable platform and trade and investment environment that provide an alternative to the instability wrought by the US. These are new investment pathways that are not in China, but which are heavily influenced by China and the framework of the BRI.
Technical outlook for the Shanghai market
The trend breakout behaviour of the Shanghai Index has failed. The rally pattern has failed. There is now a low probability of a new uptrend development following a successful breakout above 3,040. The fall below critical support near 2,920 suggests the Shanghai Index will continue a sideways movement.
This retreat is confirmed as part of a consolidation pattern that may continue for several more weeks.
The retreat from 3,000 and the unsuccessful retest of support near 2,920 confirm the continuation of the longer sideways consolidation pattern. The broad sideways band started in May. The base support of this trading band is near 2,830 and the upper resistance level is near 3,040. Since May, the Shanghai Index has oscillated around the central support and resistance level at 2,920. Over the past nine weeks, the index has remained in the upper section of the trading band between 2,920 and 3,040. This suggested a bullish bias in the index.
The sustained fall below 2,920 shows the index surrendered the potential to rally and develop a new sustained uptrend. The fall below 2,920 suggests the index will continue to trade in a sideways trading band. The long-term Guppy Multiple Moving Average (GMMA) has failed to develop any strong separation, and this shows investors are not confident about trend direction.
The short-term GMMA has dipped below the long-term GMMA for the first time since Oct 8. The current dip is also accompanied by a downwards move in the long-term GMMA. This tells us that investors have joined the selling and suggests that the downtrend pressure has become stronger.
A sustained fall below 2,920 has a downside target near 2,830. This is the long-term support area for the lower edge of the trading band.
A rally rebound and move above the centre support and resistance line at 2,920 is mildly bullish. There is no longer strong evidence to support a sustained rally and retreat of the upper resistance level near 3,040. This situation is created by the downturn in the long-term GMMA. This is the first evidence of a change in the way investors are thinking. It is not yet a strong downtrend, but does signal the end of uptrend pressure.
Traders anticipate weaker rallies and stronger retreat in the coming weeks.
Daryl Guppy is an international financial technical analysis expert and special consultant to AxiCorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as ‘The Chart Man’. He is a national board member of the Australia China Business Council.
