SINGAPORE (Oct 29): Inserted by the US and locked deep down in Chapter 32 of the renegotiated North American Free Trade Agreement is a poison pill. It gives the US veto rights over Canada’s and Mexico’s signing of free trade deals with China, although the language is couched in terms of “non-market’ economies as defined by the US. It is actually more than a veto, as any China deal would invalidate the new Nafta, allowing the US to unilaterally walk away.
This is not an issue confined to only Canada, the US and Mexico because, if successful, it may act as a template for the way the US proceeds with negotiations with other trade partners.
After decades of supporting China’s integration into the global economy, the US is now focused on disrupting commercial supply chains between Beijing and the US’ foreign partners. This drags previously uninvolved third parties into the dispute and limits their ability to pursue their own interests in trade.
At a Belt and Road Initiative conference in Zhangjiajie last week, a senior economic counsellor from Europe, and just appointed to Beijing after three years in Washington, noted that the time for keeping your head down had passed. Many smaller countries had hoped that, by staying out of the fray, they would be able to avoid the consequences of the Trump-initiated trade war. The poison pill inclusion shows this is no longer possible.
The first indication of this was the demand by the US that European countries stop trading with Iran because the US had decided to walk away from the Iran nuclear agreement. Companies that had been compliant with unchanged international law were suddenly forced by unilateral US action to stop their commercial business.
An extreme scenario discussed in Zhangjiajie but also considered by finance policymakers at the International Monetary Fund meetings in Bali was the possibility of US President Donald Trump’s escalating his economic attacks on China by pushing for Iran-style multilateral sanctions. This would force countries to choose between doing business with China or the US.
Derek Scissors, a US-China economic expert at the American Enterprise Institute in Washington, says the US is considering more steps “that would move closer to forcing countries to limit their trade and investment with either China or the US, especially in advanced technology”.
Investors can no longer ignore the implications and the impact on portfolios. There may be a devastating impact on companies doing business with China or those dependent upon China business. University collaborations with China on R&D, particularly in emerging technology such as artificial intelligence and quantum computing, could face scrutiny or outright termination. Companies planning to invest in China business or markets, or those seeking to attract Chinese investment, may find their options suddenly limited by a US fiat.
The political solutions are not the provenance of investors, but the consequences for investors have become more pronounced, particularly if trade pressure is used to roll back existing trade agreements with China.
Technical outlook for the Shanghai market
The Shanghai Index rallied strongly from 2,449 but failed to test the significant resistance level near 2,695. The rally touched the lower edge of the long-term Guppy Multiple Moving Average indicator and then retreated. It was not a serious challenge to the dominance of the downtrend. The long-term GMMA group of averages showed no indication of compression and this shows that investors remain committed sellers.
The rally rebound was not part of a V-shaped recovery. The probability of a strong V-shaped rebound trend recovery remains very low because of the strength of investor selling. A V-shaped rebound quickly leads to compression in the long-term GMMA as investors pile into the rally and support the rebound. These essential features were missing from last week’s rally.
Traders wait for a consolidation pattern to develop. Consolidation is when the index moves sideways with no trending activity. The increase in index volatility works against the potential to develop a consolidation pattern. The large falls in the US markets also add to the downward pressure on all international markets. So, it is too soon to look for the beginning of a consolidation pattern.
The weekly and monthly charts provide some indication of where the next support level is located. The first strong support level is near 2,400. This acted as a support level in 2010 and as a resistance level in 2012 and 2013. Historically, there is no strong support level between 2,690 and 2,400. So, there is a very low probability that the index will find support above 2,400.
Despite strong rallies, the secular trend remains down. Rallies, as shown last week, are short=lived events with limited trading opportunities from the long side. Investors and traders will stay out of the market until support is proved near 2,400.
As the index approaches 2,400, traders watch for evidence of slowing momentum and weak rally rebounds. A fall of this magnitude means it will take some time for a new uptrend to develop.
The fan trend-reversal pattern has been invalidated by the sustained fall below the 2,695 support level.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axi Corp. 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.