China complex in focus

Gung Hei Fat Choy to those celebrating Chinese New Year today. From myself and the team at City Index, we wish you a healthy, happy and prosperous 2019!

With markets and trading likely to be subdued due to the Chinese Lunar New Year holidays this week, it would appear to be an opportune time to look at two of the China complex of markets, after the key events of last week.

The first event from last week I am referring too was the more dovish than anticipated message delivered at the Federal Reserve meeting last Thursday morning. The U.S. interest rate hiking cycle was paused, and this pause is likely to continue to see risk assets supported in coming months. Some analysts are cheekily suggesting there is now a “Powell put” in the equity market, a name that follows Federal Reserve Chairman Powell’s predecessors Bernanke and Greenspan who moved to lower interest rates when stocks looked shaky.

The second event was news last week that China - U.S. trade talks in Washington had finished on a positive note with U.S. trade negotiators agreeing to visit China in mid-February for another round of talks. As a follow up to this, reports out over the weekend suggest U.S. President Donald Trump will meet with Chinese President Xi Jinping in Vietnam on the 27^th and 28^th of February. President Trump’s love of a deal is well known. Could it be at the meeting in Vietnam an announcement has been pencilled in that confirms a de-escalation in trade tension and narrowly avoids the March 1 deadline for tariffs on US$250 billion of Chinese exports, to rise from 10% to 25%? Humm.

Regardless both copper and China A shares have enjoyed the benefits of last week’s developments. With both U.S. and China monetary policy settings now set at more dovish levels, we review the possibilities of further gains in both markets.

Firstly, to copper. Copper inventories are reportedly at 10-year lows and with Chinese copper consumption set to grow at a modest pace, copper supply is expected to remain in deficit in 2019 and 2020.

As viewed on the chart below, copper futures started the year with a test and bounce from support, near to 2.5500. At the overnight closing price of 2.7795, copper futures have rallied 10% in just over 1 month.

A nice move and with the more benign backdrop outlined above, it would be reasonable to expect the current rally can continue towards resistance 2.8800ish, another 3% higher. A close above 2.8800ish would really excite the market and open the window for a push towards 3.000 and possibly 3.2500. One to keep an eye on.

Elsewhere, China A shares had a torrid time during 2018. However, there are initial signs that perhaps the worst is over as China A shares, posted a 10%+ gain for January of this year.

Like copper, the current rally looks set to continue towards the top of the recent range, 12000 area where I would expect to see sellers/supply emerge. That said, a break and daily close above 12000 would likely see short sellers reassess, encourage new buyers into the market and allow the January rally to extend.

Disclaimer

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