Written By: Chris Vermeulen
March 8, 2019, may gain some level of infamy over the next few decades. There were two big numbers released on Friday: the current Chinese trade data and the US Jobs data for February 2019. Both numbers fell drastically lower than analysts expected, and the global stock markets dropped in pre-market trading by more than 1%.
Yet, something very interesting transpired through the trading day – a recovery rally.
The Chinese economic data was particularly devastating. It leads our researchers to ask a very critical question, “is this going to be an orderly contraction, or is this contraction going to extend into more chaos?” Our research team believes the economic contraction in China will extend into much of Asia and nations participating in the Belt Road Initiative (BRI) over the next 3~6+ months. We believe a natural progression of “protectionist processes” will begin to take place throughout many of these nations as the money spigot from China dries up. We believe this credit contraction and economic downturn will result in an extended repositioning of priorities, assets, and valuations throughout most of southeast Asia and India and could extend into certain areas in Europe and Arabic nations.
Source: Bloomberg Finance L.P.
The economic data released by China points to a very real and excessive economic contraction. Exports declined 16.6% in February, year-over-year, vs. an expected increase of 6.6%, while year-over-year imports were reported at -0.3% vs. an expected +6.2%. Trade balance was also much weaker than expected, coming in at $4.12 billion vs an expected $26.20 billion. Think about these numbers. In some cases, these values represent a -300% to -700% decrease from expected levels, while a recent Bloomberg article suggests the China GDP levels were inflated for the past 9 years or more.
As these new economic numbers work through the news cycle, we’re confident that a fairly large group of global investors are going to catch quite a few investors and traders off guard. The recent rally across Asian equity markets has prompted a bit of complacency and upward price expectations by investors. The rally, shown below, from early 2019 until now resulted in a 17.7% increase over a period of about 60 days. We are confident this upside move attracted the attention of many global investors who likely piled into the trade expecting a US/China trade deal over the past 2 weeks to relieve any upside pricing pressures. Now that the data is showing greater risk in the Chinese markets, how that may extend to other regional markets becomes the top consideration for these investors.
The fact that the Chinese markets may contract by at least 8~15% over the next few weeks must concern larger investment firms and traders. Depending on their leverage, this could be a complete disaster for some. Any extended protectionist move by China and/or additional pressures on the credit/debt balance could push a new wave of defaults and extended downward pricing pressures. Our researchers believe a move targeting recent October/December 2018 lows is not out of the question.
Custom Index – Custom Index chart by TradingView
As we’ve been suggesting in our recent research posts, we believe a new capital shift is taking place. We believe investors were willing to take a risk to jump back into certain market segments where new valuation levels presented some clear opportunities (China, Europe, and others). Yet, we also know that extended risks could quickly change this stance. As renewed fear enters the global markets, it is very likely that another “revaluation event” will take place and investors will start to scramble for safety. This is the capital shift about which we have been warning – a dramatic shift of investment capital away from emerging markets and foreign opportunities into US blue chips and mid-caps because of the true US dollar based safe-haven investments.
Should our expectations of this dramatic capital shift accelerate over the next few months, we’ll likely see the current downward price rotation in the US stock market end sometime in early April as global capital resettles into US equities.
In the next segment of this research post, we’ll share some critical data that may become a catalyst for the capital shift that we believe is currently taking place.
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