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Analysis and Charts of Global Markets

written by Gary Dorsch, Editor and Publisher
China aims to Weaken the Yuan; Rattles markets
Aug 20, 2015
On August 11th, the hierarchy of the Chinese Politburo surprised the global financial markets, by unilaterally devaluing the yuan against the US$, without any advance notice. Beijing quickly engineered a -3% devaluation of the yuan against the US$ in two days, in what it called a “one-off” operation. Still, the surprise move sent various financial markets around the world into a tizzy, as analysts, pundits and traders began to speculate that the latest move by Beijing was just the first salvo in a campaign to gradually weaken the yuan against the US$, and possibly, to keep the yuan on an even keel with other major reserve currencies, such as the Euro and the Japanese yen.
Bonds and Currencies Brace for BoE and Fed rate hikes
Jul 16, 2015
with the Federal Reserve poised to hike short-term interest rates for the first time in nearly a decade, “The actual raising of policy rates could trigger further bouts of volatility, but my best estimate is that the normalization of our policy should prove manageable,” said the Fed’s “Shadow” chief Stanley on May 26th. Fischer gave no time frame for when the Fed will start its first tightening cycle since 2004-06, but he made it clear that higher rates are coming. Still, he warns, communications can be a "tricky business,” and when the Fed does tighten, policymakers are bracing for spillovers to financial markets both at home and abroad. “Some of the world’s more vulnerable economies may find the road to normalization somewhat bumpier,” he added. The key question hanging over the markets, in general, is whether the Federal Reserve and its Anglo sidekick, the Bank of England , will finally begin to hike their short-term interest rates in the months ahead. On June 28th, the Bank for International Settlements, , based in Basel, Switzerland, which is an adviser for global central banks, called on the world’s top central banks to start normalizing monetary policy, - either by raising interest rates, or shutting down the printing presses under the guise of “Quantitative Easing,” , and the sooner the better.
China’s Stock market Mania; How high can Red-chips fly?
Apr 2, 2015
While Beijing was busy cracking down on money laundering in the casino colony of Macau, it was also sanctioning its securities regulators, stock brokerage firms, overseers of the stock exchanges, and hundreds of high-tech engineers, to begin working night and day to launch the world’s third biggest casino, - dubbed “Shanghai - Hong Kong -Stock Connect.” It would allow global investors to trade Chinese Shanghai “A-shares” for the first time, through brokers located in Hong Kong, and mainland Chinese investors could trade Hong Kong’s ”H-shares” index via the Shanghai Stock Exchange, subject to quotas both ways. The combined size of the Chinese and Hong Kong markets is roughly $10.5-trillion today, behind only the combined $27-trillion size of New York Stock Exchange and Nasdaq.
The Raging “Currency Wars” across Europe
Jan 29, 2015
The theater of the absurd became even more bizarre on Jan 22nd, when the European Central bank desperate to extract the Euro-zone’s economy from the quagmire of deflation and stagnation, decided it would try its hand at the magic elixir of “quantitative easing,” (Q€). Starting on March 1st, the ECB will inject €60-billion of liquidity into the Euro-zone’s money markets, each month until the end of Sept 2016. The ECB is the last of the Big-4 central banks to unleash the nuclear option of central banking – QE, - starting about six years after the Bank of England, the Bank of Japan, and the Fed began flooding the world markets with $7-trillion of British pounds, Japanese yen and US$’s.
How to Recognize a “Bear Raid” on Wall Street
Oct 30, 2014
The objective of a “Bear Raid” is to make windfall profits within a brief time period through short sales. Bear Raiders must closely monitor the number of short positions in the target stock, or exchange trade fund, (ETF), since a huge short interest increases the risk of a short squeeze that can inflict substantial losses on the Bears. These short sellers cannot afford to wait patiently for many weeks or months until their short strategy works out. They must act to cover their short positions, before other investors see the beaten down market as a bargain. --------------------- If operating in the US’s centrally planned market, where the Fed is actively intervening to prevent sharp downturns, the Bear Raider knows the gains from the short sale trade will eventually be reversed, and usually within short order. Once Bullish investors begin to realize that they were hoodwinked, and scared out at the lows, - they begin to pile back into stocks again at higher prices. What usually follows is an eventual recovery of all the previous losses that were engineered by the Bear Raiders.
 
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Euro's Sharp Slide versus China's Yuan undermines China's Exports to Europe
Updated 4:09 PM, Aug-20, Thu
The central planners in Beijing have attained an almost mythical status. Year after year, Beijing was able to attain growth of +10% or more over a span of two decades, and in the process, transformed China’s economy into the second biggest in the world, while lifting many households out of poverty and others into the middle class. But the mystique appears to be fading. Beijing is trying to rebalance the Chinese economy, to make growth less focused on exports and more reliant on domestic services and consumer spending. It wants slower but more sustainable growth of around +7%. But engineering such a soft landing is proving more difficult than expected. Most analysts agree that China’s official figures are overstating the growth rate of China’s economy. Commodity traders know this to be the case, given the huge declines in the prices of iron ore, coking coal, copper, natural rubber, and crude oil, which speaks volumes about the sharp downturn in China’s economy. ------------------------------China’s economy is starting to buckle under the “strong yuan” policy. Beijing adhered to the “Strong Yuan” policy for 10-years, and allowed the yuan to climb by a total of +28% versus the US$. More recently, China’s yuan appreciated by +30% against the Euro, and +65% against Japan’s yen. But now, China is signaling a major shift in regards to the yuan’s exchange rate, under the guise of a more market oriented “flexible yuan” policy. -------------------------------------------------------------------- On August 11th, the hierarchy of the Chinese Politburo surprised the global financial markets, by unilaterally devaluing the yuan against the US$, without any advance notice. Beijing quickly engineered a -3% devaluation of the yuan against the US$ in two days, in what it called a “one-off” operation. The sudden “one-off” revaluation of China’s yuan caught the world markets completely off guard. However, in hindsight, the pressure that brought about the demise of China’s decade long “strong Yuan” policy, had been developing for quite some time. Most notably, the Euro’s multi-year decline against China’s yuan that began in April 2011. China ships about $30-billion per month, on average to the EU, it’s second biggest trading partner, and the yuan’s rapid rise against the Euro is taking a heavy toll on Chinese exporters. Most recently, the Euro’s slide versus the yuan was greased by the European Central Bank’s ultra-easy monetary policy, that ultimately turned to the nuclear option on March 9th – Quantitative Easing , with liquidity injections of €60-billion per month. ---------------------------------------------------- As such, China’s exports to Europe were -12% lower in July than a year earlier. Exports to Japan, Hong Kong, and Korea, are also contracting at double digits rates. Output by China’s vast factory sector, which employs tens of millions of workers, is slowing dramatically as demand collapses in its three largest export markets – the European Union (EU), the US, and Japan. With the EU floundering in the swamp of stagnation, caused by austerity; with the US barely growing, and with Japan’s economy sliding back into recession, China’s export growth engine is running in reverse in all three regions. Exports slumped to $195-billion in July, or -8.3% lower than a year earlier. The figures were worse than expected and validated suspicions among private analysts that China’s economy is growing at a far slower rate than the statistics than are conjured-up by government apparatchiks. ------------------------------------August 17, 2015 On August 11th, the hierarchy of the Chinese Politburo surprised the global financial markets, by unilaterally devaluing the yuan against the US$, without any advance notice. Beijing quickly engineered a -3% devaluation of the yuan against the US$ in two days, in what it called a “one-off” operation. Still, the surprise move sent various financial markets around the world into a tizzy, as analysts, pundits and traders began to speculate that the latest move by Beijing was just the first salvo in a campaign to gradually weaken the yuan against the US$, and possibly, to keep the yuan on an even keel with other major reserve currencies, such as the Euro and the Japanese yen. ------------------------Symbolically, last week’s shock move to devalue the yuan signaled the end of China’s “Strong Yuan” policy that began a decade earlier, on July 21st, 2005. ---------------As fears of a hard landing have increased, China’s policymakers have started to panic. In July, Beijing was forced to quickly arrange radical schemes aimed at preventing a meltdown in the local stock market. China’s newly established “Plunge Protection Team” , hijacked the stock markets, as the central planners sought to enforce a floor under the Shanghai red-chip market at the 3,500-level. The interventionist measures haven’t restored investor confidence. Professional traders know that China-A shares traded in Shanghai are trading at a +37% premium above dually listed H-shares in Hong Kong. ---------------------------------------------------- Still, Beijing is expected to reduce the value of the yuan gradually, in a carefully orchestrated way, as part of its drive to engineer a soft landing for the economy. And for now at least, the PBoC is expected to intervene in the currency markets in order to control the speed of the devaluation, and thereby, avoid making the yuan a big issue in the US’s presidential campaign. But China’s economy has defied the naturally recurring swings in the business cycle, and has avoided a recession for decades, and if China’s economy weakens further, the country’s leadership may not have the luxury of being able to massage its currency incrementally lower. Beijing might have to opt for a faster and steeper decline to boost exporters. Then the markets, in response, may aggressively push the yuan lower if economic numbers are poor, and the PBoC reacts by slashing interest rates and banks’ reserve requirements.
Archived Comments:
Euro's Sharp Slide versus China's Yuan undermines China's Exports to Europe
ECB and PBoC engage in a "Currency War" over the Euro´s Exchange rate with China´s Yuan
Updated 4:00 PM, Aug-20, Thu
Like many things in China’s economy, the yuan is controlled by a mix of market forces and government decree. Until now, Beijing set a target for the trading of its currency against the US$, then allowed investors to buy and sell the currency within a band - set by the PBoC. However, on August 11th, Beijing made a technical change to give market forces more influence in determining the yuan’s value: it said that “henceforth the mid-point of an expanded 2% band within which the currency can move on any single day would be based on the previous day’s closing value.” In other words, the yuan’s exchange rate would become more volatile, and adds an extra degree of risk, for investors in Chinese based assets. The new policy could also attract a bigger swarm of speculators into the foreign currency markets, especially for currency pairs against the yuan, traded in Hong Kong. --------------------------------------------------- In some ways, the move to a wider trading band, follows what US-politicians have been pushing for China to adopt for more than a decade; a more market-oriented exchange rate. The PBoC said the daily starting rate would be set in line with “demand and supply conditions in foreign exchange markets and the movement of major currencies.” As such, Beijing could begin to enforce a more even playing field, as part of its “free-market reform,” that targets the value of the yuan to the Euro and the Japanese yen, and the currencies of its major trading partners, such as Korea, Taiwan, and Australia. ------------------------------------------------ China’s yuan is one of the few currencies in the world that has not devalued a lot against the US$ in the past year. Instead, it’s up about +20% against a basket of other currencies that China trades against. Although Beijing has devalued the yuan by -3% against the US$ so far, it’s still far behind the devaluations of other major currencies. Countries that don’t join the currency wars, usually end up suffering, - they export less. It’s a very big problem for China, and it’s not going away anytime soon. -------------------------------------The PBoC says the move was a one-off depreciation, and PBoC deputy Yi Gang said there is no basis for continued depreciation of the yuan. In any event, any effort by the PBoC to weaken the yuan further against the Euro would get significant pushback from the ECB, which is injecting €60-billion of fresh liquidity each month through Sept ’16, as part of its bond buying scheme. Since the start of Dec ’14, the ECB has injected a net €500-billion of excess liquidity into the Euro-zone’s banking system, as part of its effort to weaken the Euro’s exchange rate. The ECB’s telegraphing of the launch of QE-1 and its actual implementation was the primary driver that drove the Chinese yuan +30% higher against the Euro in the 12-months thru April ’15. -------------------------------------------------------------- However, the Euro has slipped from its recent highs, weakened in large part by the PBoC’s counter moves. The PBoC has slashed reserve-requirement ratios , by a total of -150-bps to 18.5% for large banks, thus, freeing up an extra 1.8-trillion yuan ($200-billion) of liquidity. Combined with four lending rate cuts totaling -150-basis points to 4.85%, the PBoC succeeded in knocking the yuan’s exchange rate lower against the Euro, from as high as €0.152 in April to around €0.1395 today.
Archived Comments:
ECB and PBoC engage in a "Currency War" over the Euro´s Exchange rate with China´s Yuan
 
Taiwan's Stock Index Plunges -20% to brink of Bear market; weighed down by weaker Exports
Updated 4:06 PM, Aug-20, Thu
Sharp Slowdown in China knocks Taiwan dollar to Six year low; A key bellwether of the Asian economy and high-tech demand, is the $495-billion economy of Taiwan, - one of the five “Asian Tigers.” Taiwan has re-tooled its economy towards high-tech over the past two decades and currently has the fourth largest information hardware and semiconductor industries in the world. Taiwan is home to Taiwan Semiconductor <2330.TW>, the world’s largest contract chip maker and Hon Hai Precision Industry <2317.TW>, also known as Foxconn, which is a key supplier of many components for the production of Apple’s iPhones and iPads, produced at its massive plants on mainland China. Taiwan’s high tech exports account for about 20% of the island’s GDP, and overall, Taiwan’s exports-to-gross domestic product ratio stands at a whopping 70%. Almost half of Taiwan’s exports are of electronics, making it extra-vulnerable to gyrations in external demand.--------------------------------------------- Taiwan is small but it punches above its weight. As a whole, the island exported $314-billion last year, 21st in the world, and only $30-billion shy of India. However, the island’s exports have been shrinking this year, and were -12% lower in July compared with a year ago. Taiwan’s exports, the key engine of its economy, have been mostly flat or contracting for the past 3-½ years. Analysts have warned that Taiwan is quickly losing its edge due to competition coming from just across the Taiwan Strait. China can make most of Taiwan’s export products on its own. From steel and petrochemical to flat panel and semi-conductor, China is establishing its own supply chain to replace Taiwan. Taiwan’s semi-conductor production for instance, was 2.6-times bigger than that of China five years ago, but that expected to narrow by half to 1.3-times this year. And Taiwan can’t compete with China in terms of cost or scale. -------------------------------- Taiwan is also losing its attraction to foreign investment, as its trade deal with China has been put on hold. Progress with a preferential trade deal between China and Taiwan has been held up after its service trade pact was stalled in June by the island’s divided parliament. Earlier this week, the Taiwan dollar fell to 30.6-US-cents, a six year low, after the government cut its forecast for annual economic growth by more than half to +1.56%, from +3.28% in May. Exports are now projected to contract for the year, dragged down by a global slowdown and growing competition from Chinese technology firms. ------------------------------------- Asian currency traders expect the PBoC will engineer a further devaluation of the yuan over the next six months to make China’s exports more competitive in the world market. China’s economic output accounts for 43% of the Asian Pacific region, so there is no doubt that other regional currencies will follow the yuan to move lower, while the magnitude of the falls in different currencies will vary. In the first seven months of 2015, China and Hong Kong accounted for 39% of Taiwan´s total exports, and so the Taiwan dollar won’t escape the impact from the yuan´s depreciation. Taiwanese exporters are calling for a weaker TW$, with some suggesting a target of 27.7-US-cents. Most ominously, Taiwan’s exports are tumbling, even though China’s yuan has risen to above TW$-5, which should make Taiwan’s exports more competitively priced compared to its Chinese rivals. Other regional currencies, such as Korea’s won, Japan’s yen, and the Singapore dollar, are expected to face similar downside risks. --------------------------------------- Like many other stock markets around the world, the Taipei stock market index was climbing sharply higher over the past few years, in defiance of weakening economic fundamentals. Exports - the key engine of economic growth, have been stagnating or deteriorating for the past 3-½ years. However, the Taiwan stock market index has taken a beating over the past four months. After briefly touching the psychological 10,000-mark in the month of May, the Taiwan stock weighted index has dropped like a rock, plunging -20%, and briefly falling below the 8,000 mark this week, as investors’ confidence was eroded by the stalemate over the preferential trade deal with China, and officials warning that further delays could have a devastating effect on Taiwan’s economic future. Traders were spooked by reports that Taiwan’s GDP for the third quarter is expected to grow only +0.1% from a year earlier, coming closer to zero growth, according to the government’s updated estimate.
Archived Comments:
Taiwan's Stock Index Plunges -20% to brink of Bear market; weighed down by weaker Exports
 

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