Chinese Market Meltdown...

7-7 Market Highlights (October 14-October 20, 2018)

China stock market meltdown! There's been a very long-term uptrend that's been intact since 1996, but the recent price action on the Shanghai Composite is now violating this. Is this a trade war effect, Chinese monetary structure, or global economic decline?

Meanwhile, like no other place in the world, the USA economy continues to expand. Ex-Fed chief Greenspan says, “This is the tightest labor market I've ever seen.” But, Allan Greenspan suggests the nearly 50-year low unemployment rate coupled with American corporations clamoring for workers will force up wages and inflation. Greenspan also gives current Fed Chairman Jerome Powell a vote of confidence, saying he's not worried about where monetary policy is headed. Despite the Sears Holdings plans to shutter 142 Kmart and Sears stores by the end of the year and begin liquidation sales as it tries to emerge from bankruptcy court, but the USA is, once again, the most competitive economy in the world.

Market closed on Friday, 10/19/2018 @:  DOW: 25,444.34;   S&P 500: 2,767.78; NASDAQ: 7,449.03;  Gold: $1,230.00; Oil: $69.37; US 10-Year: 3.196% 

Here are the highlights of the 43rd week of 2018:   

1.   China Stock Market Wiped Out.           Chinese stocks break a two-decade trend, and that could signal more downside as trade war looms. China's Shanghai Composite sank to four-year lows this week, while the so-called BATS stocks: Baidu (BIDU), Alibaba (BABA), Tencent (TCEHY), and Sina (SINA), have suffered heavy losses this month. That tsunami of selling has inflicted heavy technical damage on the Shanghai Composite, says one technician. "There's been a very long-term uptrend that's been intact since 1996, and the recent price action on the Shanghai Composite is now violating this," Craig Johnson, a chief market technician at Piper Jaffray, said on Thursday. As of Thursday’s, close, the Shanghai was 30% below its 52-week high, pushing it deep into a bear market. Another 20% drop would drag it 44% from the year's highs. It rose 2.58%, even though China's latest GDP report was lower than expected. China's economic growth slowed more than expected to the weakest pace since the first quarter of 2009 as the country's trade war with the U.S. puts pressure on growth, according to official data released on Friday. The world's second-largest economy said its economy grew 6.5% year-over-year in the third quarter of 2018. That missed expectations for a 6.6% growth, according to Reuters. The latest GDP data also came in lower than the 6.7% year-over-year expansion in the previous quarter.

2.   US B-52s Flies South China Sea.         Two US B-52 bombers flew near contested islands in the South China Sea Tuesday according to a statement from Pacific Air Forces. The two B-52H Stratofortress bombers which are based in Guam "participated in a routine training mission in the vicinity of the South China Sea," the statement said. The flight was part of US Indo-Pacific Command's "Continuous Bomber Presence operations" which have been ongoing since March 2004. The US regularly flies aircraft in the South China Sea, but Beijing is particularly sensitive about the operations when they come near areas where the Chinese government has built islands and established military facilities on disputed maritime features.  The "Chinese have successfully militarized some of these outposts and their behaviors become more assertive and we're trying to have an appropriate response," US Assistant Secretary of Defense for Asian and Pacific Security Affairs Randall Schriver told reporters traveling in the region with Secretary of Defense James Mattis. A Chinese destroyer recently sailed within 45 yards of the USS Decatur, forcing the American warship to maneuver to avoid a collision while it was sailing near the disputed Spratly Islands in the South China Sea.

3.   US, World's Most Competitive Economy.      The United States was named the world's most competitive economy by the World Economic Forum (WEF) on Wednesday. In its Global Competitiveness Index, WEF, known for its annual economic forum in Davos, Switzerland, ranked the U.S. as the most competitive of 140 economies, the first time the nation has reached the top spot in a decade.  US financial system remains competitive as it scored 85.6 out of 100, with its strengths including business dynamism, its labor market, and the financial system. However, the report noted that the U.S. economy was being held back by a weakening social fabric, worsening security, lack of IT adoption, and corruption. It also lagged most advanced economies in terms of health, with the country's life expectancy three years below the average of advanced economies. The 10 most competitive economies are: 1) U.S., 2) Singapore, 3) Germany, 4) Switzerland, 5) Japan, 6) Netherlands, 7) Hong Kong, 8) U.K., 9) Sweden, 10) Denmark. And, the 10 least competitive economies are: 1) Chad, 2) Yemen, 3) Haiti, 4) Angola, 5) Burundi, 6) Congo, 7) Sierra Leone, 8) Mozambique, 9) Liberia, 10) Mauritania.

4.   Fed Staying Course for Rate Hikes.         FED officials remain convinced that continuing to gradually increase interest rates is the best formula to preserve a steady economy, according to minutes released Wednesday of the central bank's most recent policy meeting. A summary of the Sept. 25-26 Federal Open Market Committee session was released Wednesday.   That may not please President Trump, who has been vocal in his criticism of the central bank's actions. Policymakers discussed what the future path would be, with members saying that there might be a period where the Fed even will need to go beyond normalization of rates and into a more restrictive stance. That would be to control inflation from overshooting the Fed's target and to address "the risk posed by significant financial imbalances." Indeed, the minutes note that future policy moves would "depend on the evaluation of incoming information and its implications for the economic outlook.

5.   Italy, Cause for Next Global Financial Crisis?            History suggests that the world is about due for another financial crisis. And, according to a growing number of indicators, Italy may be the center of it. Financial crises tend to arrive every decade or so, and Italy is near the top of a list of flashpoints that could touch off the next one, alongside Turkey’s economic and political turmoil, President Trump’s trade war, Britain’s exit from the European Union, and a broad slowdown in global growth. But in contrast to the financial crisis that began in 2008, central banks may not be able to come to the rescue this time. They used up much of their resources coping with the last meltdown. It would be very difficult for Mario Draghi to think of another way to get out of the mess. Many of the ingredients are there. A pile of questionable debt. Weak banks. An erratic government. And a sizable economy able to inflict collateral damage outside Italian borders. The Rome government’s populist spending plans, widely regarded in financial circles as reckless, have caused market interest rates on Italian debt to spike, threatening to create a so-called doom loop that would ripple through the struggling economy. 

6.   Canada Legalizes Pot.           After months of political haggling and legal debate, Canada joined the U.S. states of California, Massachusetts, Maine, Alaska, Colorado, Washington, Nevada, Vermont and Oregon as the first Group of Seven country to OK adult use of pot. The major cannabis stocks ran up in anticipation of this day and offered investors on Wednesday a reminder of just how volatile some of the young pot companies have become amid a flurry of news and speculation. Canada, the first G-7 country to OK adult use of pot Wednesday. Medical marijuana company Tilray, (NASDAQ: TLRY) whose stock has posted a meteoric rise on the Nasdaq since its U.S. IPO, shed more than 6% Wednesday. Tilray, Canopy Growth (NYSE: CGC), and Aurora Cannabis (Toronto: ACB), are currently the most popular post stocks among traders on Wall Street. Aurora got approval to list on the NYSE on Wednesday. Some members of Wall Street's cannabis community cautioned that the rapid rise in pot stock prices could be followed by modest sales in the early innings of legalization. "While the opportunity is large, the market is going to develop in phases both in terms of product availability as well as retail access points," Cowen analyst Vivien Azer said. 

7.   Saudi Arabia Conference No More…          International Monetary Fund (IMF) managing director Christine Lagarde has postponed her trip to the Middle East. The investing event in Riyadh has seen mounting cancellations since the disappearance and suspected killing of Washington Post columnist Jamal Khashoggi. Turkish officials allege that he was murdered by Saudis, but Riyadh has fiercely denied the claim. Media outlets including CNBC, Financial Times, CNN and The New York Times have also withdrawn from the event. Several key figures also will not be attending the event, including Treasury Secretary Steven Mnuchin, J.P Morgan CEO Jamie Dimon, BlackRock CEO Larry Fink Fink, Blackstone CEO Stephen Schwarzman and Mastercard CEO Ajay Banga...  Lagarde told reporters at the IMF and World Bank annual meetings in Bali, Indonesia, that she was "horrified" at the suspected killing of Khashoggi. U.S. Secretary of State Mike Pompeo met Saudi Arabia's King Salman, Crown Prince Mohammed and Foreign Minister Adel al-Jubeir in Riyadh on Tuesday to discuss the matter and flew to the Turkish capital of Ankara on Wednesday to meet Turkish officials. However, Treasury Secretary Steven Mnuchin has decided to take part in an anti-terror finance meeting with Saudi security officials and their Middle Eastern counterparts in Riyadh later this month, opting to attend despite growing global outrage.

These are my researched and analytical thoughts on the highlights of the week. Perhaps you should take a closer look at them, do additional research and analysis if these are interesting to you. This “7–7 Market Highlights” is presented for your general knowledge, the resource for management, and perhaps as a tool for career development, and building wealth. As always, you decide on your own final analysis and position. 

Mahalo. I welcome your thoughtful comments, “like” notes, and “share” of this publication. 

~ S. Vincent Shin

   www.dhirubhai.net/in/vshin

Image credits Bloomberg News, Getty image, AP Photo, Reuters, CNBC, and special thanks to Image & Visual Consultant @U.Y.