Chinese equities at the cutting edge

Posted on 29 April 2011

A week of other commitments that have deprived me of this blogs warm embrace…and the US market is still playing to the same script – USD lower, equities higher.

Still looks like a final thrust higher to my jaundiced eyes, which would be consistent I guess with the Fed spending its remaining QE pennies. Divergences are undermining the new highs in the indexes – as noted by Traders Narrative (here). Our principle breadth indicator continues to trend lower and in a week or two will be testing the now well established downtrend. Indications are that the earnings season hasn’t been sufficiently robust to warrant a wholesale upgrading of forecasts – which perhaps confirms that what breadth is telling us – that prices are stretched relative to earnings.

Still the divergence that is perhaps the most interesting is coming from Chinese equities. The authorities in China have been ratcheting up borrowing costs in a gradually more pressing attempt to rein in price increases across the economy. Whether they are being successful or not is a moot point from our immediate perspective – what is clear is that the equities markets don’t like the attention. This is in stark contrast to the US equity markets – and note that Chinese equities have form for leading the US…

If we look into the sector performance, unsurprisingly the financials have been lagging for some time, but perhaps more relevant to the recent price action in developed world markets, the materials and energy sectors have taken a turn for the worse. (A more detailed look into the composition of the Chinese equities market here)