SINGAPORE (Apr 17): Amid the Covid-19 pandemic, more than a thousand people are dying day after day, unemployment is nine times greater than in 2008, and yet the US stock market continues to rally. This is an apparent disconnect between economic reality and the market. Surely, at some stage, the American market will wake up with a genuine shock and reconnect with reality.
When it does, the impact on regional markets, on investment flows and supply chains, and on China’s recovery will be as rapid and substantial because blowing down the deserted canyons of Wall Street is the idea that the US must disconnect from China and punish China.
With all the adverse economic impact, this idea is reminiscent of the Vietnam War period and the infamous American claim: “We must destroy the village to save it.” This American momentum to isolate, disconnect and punish appears to have dire consequences, not just for China, but also the US economy and for countries that wish to continue to do business with China.
Here are three external investment and trade impacts to consider.
The first is the weaponisation of the US dollar. This is achieved via the imposition of punitive sanctions and the threat to exclude companies from the SWIFT dollar settlement system. President Trump has shown increasing willingness to use the dollar as a weapon.
European companies trading with Iran were threatened with these sanctions when the US unilaterally imposed sanctions in 2019. It is important to note that this exclusion from the dollar settlement system applied to all of their business and not just their Iranian business. More recently, the West Australia government has been forced to abandon an agreement with Huawei to provide services for their new rail network.
The second impact flows from the first. This is the further development of an RMB-based trade settlement system. This includes the rapid development and deployment of a sovereign digital currency and its regional adoption. This provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at country and company levels. A key question will be if these two systems will operate concurrently or exclusively.
The third impact is the strengthening of the Belt and Road Initiative as a champion of free trade. China appears to have prioritised Covid-19 aid to Belt and Road countries, although it has also provided materials to the US. This is an exercise in soft power, and this is consistent with the preferred Chinese strategy of protecting, rather than expanding, borders through trade relationships.
This impact is accompanied by an accelerated opening of Chinese capital markets as stable and reliable investment choices. Unlike the US dollar, the RMB has offered an island of currency stability in recent months. Recent capital opening initiatives include increasing foreign participation in banking and credit services.
Regional governments will be asked to choose, but what they choose may not necessarily be the way the Americans expect. Choices have been made easier by the reluctance of the US to support international Covid-19 assistance efforts and the suspension of World Health Organisation (WHO) funding at this critical time. Choices will be made easier if China is able to move quickly to establish affective alternative trade settlement avenues that do not rely on and cannot be threatened by the weaponisation of the dollar settlement system.
Investors will be asked to make the same choice.
Technical outlook for the Shanghai market
The position of the uptrend line in the Shanghai Index has been largely confirmed with the April 13 rebound from near to the trend line placement. This becomes the third anchor point in the trend line placement. This is particularly significant as the trend line is now used to define the rising trend because it acts as a support feature for the new trend.
It may seem overly technical, but the accurate placement of a trend line based on their anchor points is critical to understanding trend and breakout behaviour. Projecting the line into the future provides a guide to future support levels. It also identifies critical pause points in the trend development. These are points where the market may pause, consolidate, and potentially develop a change in trend. These pause points are created when two dominant chart features intersect.
The most common is an intersection of a sloping trend line and a horizonal support or resistance level. This has the potential to create a triangle pattern. These are useful guides to how breakouts can develop, and the pattern is also used to set reliable upside targets.
A triangle has three sides — the upper and lower edges, and a vertical base. The base is formed by several days of strong price activity moving in a single direction. With the Shanghai Index, the base is created by the four-day fall in the market from March 16 to 19.
The base of the triangle is measured, and this value is projected upwards to give a breakout target. The target is most reliable when it is also near to an historical resistance level. The upside projection for the Shanghai Index triangle pattern is 3,060. This is very near to the horizontal resistance level at 2,980.
However, the key development is that the Shanghai Index must remain above the new uptrend line and that it is able to break above the resistance level near 2,850. The gentler slope of the current trend line is usually associated with more stable and sustained uptrend behaviour.
This type of restrained rebound is consistent with the double-bottom breakout trend pattern that makes the right-hand side of the W-recovery chart pattern. The first target for this pattern is a retest of the peak near 3,060. There are two major resistance features to overcome before the index can reach the 3,060 target level. The first is historical resistance created by the lower edge of the trading band near 2,850. The second is the value of the resistance level near 2,980.
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.
