Greetings from Singapore early this Sunday morning…

Today we are checking in with a couple of China’s metrics (GDP, Forex Reserves and the Yuan) – before we update the weekly XJO chart.

We also offer a great trading tip around probabilities.

To kick things off – regular readers will know we keep a close eye on ”all things China” as our economy (and its near-term growth and income) heavily depend on it.

We are now the proud owners of record amounts of private debt we need to service (mostly opposite white picket fences) – and for that you need income (generally).

Or at least that’s what I know. So let’s see how our greatest “income source” is travelling… 

Chinese GDP Steady…

As a preface, whether or not you believe China’s official GDP is up to you.

Personally, how they can calculate the spending, buying, investing habits of over 1.3B people just “days” after a quarter ends (within a fraction of a decimal point) is a modern-day miracle in itself. Most other economies take months to pull this stuff together.

But let’s take the numbers at face-value… and assume their abacuses are that sophisticated.

Based on the latest read – it feels like China is pulling back from the (growth) abyss.

They scared the pants off everyone (mostly Australia) around two years ago when it looked like their stock market and economy were tanking.

Chinese GDP Growth


As the chart shows, real GDP growth has found support in the 6-7% range.

But what’s clear is the hyper-growth of 8% YoY are now long-gone. It was never going to be sustainable – not at that scale.

As I reminded readers at the time, for Chinese to continue growth at that speed, they will need to use even greater amounts of credit. And I think going from $2T to $24T in credit (over 14 years) was about as fast as you could possibly go.

Here’s Reuters (bold emphasis my own):

China’s economy expanded faster-than-expected in the second quarter, setting the country on course to comfortably meet its 2017 growth target and giving policymakers room to tackle big economic challenges ahead of key leadership changes later this year.

The boost to growth was in part driven by firmer exports and production, in particular steel, which could heighten trade tensions as the United States and China begin economic talks this week. U.S. President Donald Trump has made the U.S. trade deficit with China a top agenda item in bilateral talks and has also flagged the steel trade as a point of contention.

China’s gross domestic product rose 6.9 percent in the second quarter from a year earlier, the same rate as the first quarter, the National Bureau of Statistics said on Monday. That was higher than analysts’ expectations of a 6.8 percent expansion.

Economic data from the second quarter has prompted a number of analysts to upgrade their GDP forecasts for China for 2017, although some moderation in growth is expected later this year as policymakers’ efforts to rein in property and debt risks weigh on activity.

“In general, we expect GDP growth to remain robust in the second half but slower than the first half, due to the high base,” Citi economists said in a research note. “Looking ahead, uncertainty remains on investment and trade.

Yuan versus Forex Reserves

Whilst China is clearly not “crashing” – we should also keep a close eye on what they see with their currency and especially their forex reserves.

Chinese Yuan v US Reserves

This is chart from Scott Grannis shows how their forex reserves plunged from $4 trillion to US$3 trillion over the previous two years (the lowest we have seen since 2010).

For those not familiar, the level of forex reserves is a direct result of net capital flows; reserves decline when outflows exceed inflows, and vice versa.

And of late – China has been particularly restrictive on outflows.

This has lead to their reserves stabilising – however I expect the trend to continue.

Here’s why:

There is a direct correlation between the relative strength of the Yuan and their foreign exchange reserves. From Yuan’s peak in 2014 – it has been weakening against the dollar (and hence Trump’s labelling them a ‘currency manipulator’).

This has been essential as they look to:

(a) manoeuvre the yuan to a level that is balancing capital flows; and
(b) ensure they remain globally competitive (nb: China is no longer the cheapest global factory)

It’s my view that once President Xi’s leadership is secure (October) — he will once again look to significantly weaken the Yuan to ensure the economy doesn’t slow further.

After all, isn’t “what’s good for China good for the world?”

Well that’s a function of your lens…

One thing is certain, an expanding China is certainly within Australia’s best economic interests (less so Trump’s – but he fails to understand global trade – another discussion for another time)

XJO Weekly Update… 

As I mentioned yesterday, the XJO remains in a bullish trend.

XJO July 22 2017

Here’s the rub:

That’s 9 straight weeks the market has sold down to the 35-week EMA – found buying support – and then rallied off this level

This is why I am such a big advocate of the 35-week EMA (more on this below)

Now it doesn’t always act as firm support – as all trends end.

Working against the trend is the weekly-MACD… there is continued weakness. This tells me the bulls don’t quite have it all their way.

So whilst our weekly intermediate trend is bullish – we remain watchful.

In the event of any “panic type” selling – I think we will see strong support around the 5450 zone. That’s 61.8% outside our current distribution – and also 50% of the previous structure.

Trading Tip

The greater weight of probabilities (which is how we trade) shows buying at the 35-week EMA gives us a statistical edge (ie we win more than 50% of the time). And we are only looking for a 1% edge.

That’s it.

Put it this way, go to the casino with a “1% edge” and place 100,000 trades, you will most likely win.

But place say 10 or 100 bets and who knows.

It’s this statistical edge that casino’s apply to punters. That is, a small probable advantage that relies on entirely on volume (hence the free drinks and free accommodation); ie stay and play!

With trading – we have a proven statistical edge that we apply over 10,000 trades… not 10 or 100 trades.

And this is why I don’t get concerned if “15 consecutive” trades don’t work out. Because I know that over time… I will win if I stick with probabilities and prudent capital management rules.

Background article to my approach: “What’s Your Trading Edge?”

Putting it All Together…

“Cautiously bullish” are the words I would choose to describe our market.

For example, it’s nowhere near as strong as what I see with the S&P 500, however we are not suggesting it’s not a sell either.

As an aside, it was interesting to watch the RBA back pedal (at great speed) this week on the possibility of any near-term rate hikes.

Tweedledum and Tweedledee

We laughed out loud – after slamming their latest minutes. Here’s The Australian:

Mr Debelle added that the current cash rate in Australia is low because the neutral rate is lower than it used to be as a result of both international and domestic developments. This means the current rate of 1.5 per cent is not as expansionary as it would have been in the 1990s or the first half of the 2000s, he said.

Looking ahead, the neutral policy rate both here in Australia as well as in other advanced economies is likely to remain lower than it was in the past, he added.

While other major central banks have turned less dovish in recent months, the RBA appears uninterested in following their lead… 

Uninterested because they can’t!

Let’s get it right.

Time to wrap this post up… I have taken up too much of your Sunday already.

We will have many more laughs at Tweedledee and Tweedledum soon enough — they don’t make it too hard.

From a trading perspective folks – all you need to is low rates (ie zero in real terms) are a boost for risk assets (eg stocks and houses).

… trade the tape

When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.

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