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No 36 strategies here

Daryl Guppy
Daryl Guppy • 6 min read
No 36 strategies here
Surprisingly, there is not one of the 36 Strategies that adequately describes the complex relationship between the Chinese imposition of high tariffs on Australian barley and US trade policy.
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(May 22): Surprisingly, there is not one of the 36 Strategies that adequately describes the complex relationship between the Chinese imposition of high tariffs on Australian barley and US trade policy.

Originating from an ancient Chinese text, the 36 Strategies refers to a series of strategies used in politics, war, and civil interaction.

Instead, we have to reach back into Western literature to find the appropriate axiom ‘Killing two birds with one stone”.

While the detail of the dispute is entirely Australian it has an impact on Singapore investors exposed to the Australian soft commodity markets and their logistics chains. In a broader sense, the displeasure has implications for all commodity producers and those who may suffer collateral damage from trade decisions or experience a double whammy. Neither of these results are bullish for regional commodity chain investments.

The starting point is apparently the sudden imposition of Chinese tariffs on Australian barley and the potential for more to follow. The tariff notice followed a more than 12-month investigation by China with a decision deadline falling in mid-May. The concurrent suspension of four beef export licensees also followed more than 12 months of complaints about incorrect labelling of Australian export beef.

These decisions were not sudden, and nor out of the blue. However the timing of the decisions was fortuitous because it provided China with a mechanism through which it could express its displeasure with recent Australian actions in loudly calling for an investigation into the source of Covid-19 clearly based on the assumption that this was China’s fault.

The WHO routinely conducts an independent investigation of all serious disease outbreaks, so the strident Australian call was redundant and unnecessarily raised China’s ire.

In the longer term, the tariff imposition is also a tit-for-tat response to the Australian imposition of tariffs in excess of 100% in Chinese steel.

China has a long history of using trade and trade access as an important part of its diplomacy. The Europeans used gunboats — now are called Freedom of Navigation exercises; the Chinese used trade access. Both are equally unsubtle and pose an increasing risk that must be considered by investors.

The real starting point for the Australian spat is located far away from both China and Australia. The Phase 1 US China trade deal was signed in January. It required China to more than triple the level of agricultural imports from the United States.

It comes as no surprise, and no coincidence, that China has just lifted a 19-year ban on US beef imports. Likewise, it is no surprise that China has just lifted its ban on US barley imports. The timing of the two Chinese actions in Australia is exquisite.

“Nothing to do with us” is the response from others in the region. It’s a smug but unjustified response. The key foundation of the Phase 1 trade deal is the destruction of existing supply chains and their forced replacement with US commodities. Barley and beef are not great exports for others in our region, but it is a mistake to assume that other commodities will also be immune from China’s need to source from the US at the expense of existing suppliers.

Investors need to look more carefully at their direct exposure to commodity producers and their indirect exposure to commodity logistics and supply chains. Australia, perhaps the best friend of the United States in Asia, has shown how little friendship counts for in American policy making and that has significant investment implications.

Technical outlook for the Shanghai market

The Shanghai Index has completed a classic Guppy Multiple Moving Average (GMMA) trend breakout pattern. This consists of a test of resistance, a second test and breakout above resistance, and then a test of the old resistance feature as a support feature. These are shown as points A, B and C on the chart. The successful completion of these tests usually confirms the strength of the new uptrend.

The new uptrend does not necessarily develop smoothly but the underlying conditions are bullish. The initial upside target is near 2,980.

The GMMA consists of two groups of moving averages. The long-term group is used to track the behaviour of investors. The short-term group is used to track the behaviour of traders.

The Shanghai Index shows the long-term group has turned upwards, compressed and is now beginning to expand. This shows increasing investor support for the uptrend. These are long term exponential moving Averages — 30, 35, 40, 45, 50 and 60-day EMAs (Exponential Moving Averages) — so this rapid compression and then expansion is indicative of a significant change in opinion about the future of the market. This is a strong return to bullishness.

The short-term group of averages shows traders are also confident, so they are strong buyers on any temporary index weakness. The value of the lower edge of the short-term group of averages is above the upper edge of the long term GMMA. This is a bullish confirmation that both traders and investors are increasingly bullish about the sustainability of the uptrend.

The limits of the uptrend are defined by the uptrend line. It is a significant support feature so traders look for any retreat to touch the value of the trend line and then rebound. A sustained close below the uptrend line is a leading indication of a trend change.

The long term GMMA also now acts as a support feature. The long term GMMA acts like an airbag on a car. It absorbs the momentum of the pullback and allows a new rebound rally to develop. If this support fails, then it signals a slowing of upwards momentum. This may also be confirmed with a move below the uptrend line.

This is a young and immature uptrend. Adventurous traders and investors will enter on any weakness in anticipation of trend continuation. More cautious investors will wait for another rally, retreat and rally rebound confirmation before entering the market with more confidence. The GMMA relationships will identify these changes in outlook.

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.

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