Asian Markets Rumble
The Plunge Toward Global Recession
By Frank Barbera CMT. June 10, 2008
This past week, Thailand's inflation rate scored a ten year high with consumer prices rising 7.6% year over year, while in the Philippines inflation is also near a ten year high at 9.6%, and Indonesia now sports a 12.70% inflation rate. Of course, this all comes on the back of reports out of China where inflation is running at an 8% annualized rate, the highest in 12 years. In the Gulf State countries, countries like Saudi Arabia, Kuwait, United Arab Emirates, Bahrain, and Dubai, inflation rates are running between 7% to as high as 12% with prices soaring at the consumer level. No wonder the People's Republic of China recently moved to tighten reserve requirements once again, raising the ratio of reserves that banks must set aside by 1 percentage point last week ahead of this Thursday's announcement. Not surprisingly, Asian equity markets collapsed last night amid the move to much tighter credit. In the history of markets, there is always a point where monetary tightening becomes aggressive and it impinges on the healthy outlook for equity markets. This "tipping point" has now been reached in Asia, and last night markets seemed to downgrade growth prospects in Asia by taking down the benchmark Hang Seng Index by 4.21%, and the Shanghai Composite down by 7.7%.
To illustrate the current situation perhaps more clearly, we overlay several items in the chart above. To begin with we show the price of Oil in both US Dollars and in Chinese Yuan, rebased to the point where the Yuan was allowed to begin floating. Of these two charts, the darker line (lower line) is the price of Oil in Yuan, with the thin upper line, the price of Oil in US Dollars. As can be seen, the appreciation of the Yuan (which is shown by the very thick black line moving down from upper left to lower right with the vertical dashed line marking the beginning of the Yuan's float) has helped dampen off some of the strong Dollar advance in Oil, but has clearly not blunted the bulk of the advance. Put another way, even with an appreciating Yuan offsetting some of the Crude Oil advance, the advance in Crude Oil is still quite pronounced when viewed from a Chinese perspective. Why is this important? Well, manufacturing economies live and die with Oil prices. Years ago in the 1970's and early 1980's, before the US exported much of its manufacturing base to Asia, when Oil prices surged, the economy foundered. To this end, in the next chart shown below, we show the year over year Rate of Change for Oil prices in Yuan. Note that at the current time on an annualized rate of change basis, Oil prices are rising at better than an 80% year over year rate of change. Spikes like this in the past were big trouble for the US economy and are very likely to be problematic for the heavily Oil dependent Chinese economy. At the very least, a serious slow down should be in the making in the wake of this Oil spike as the "pass through" inflationary pressures this type of spike creates cannot help but rumble through an economy like that seen in China.
Above: year over year Rate of Change of Oil prices in Chinese Yuan terms.
In fact, throughout all of Asia, while currencies have been appreciating against the US Dollar, so far the advance in Asian Currencies has not been enough to thwart, or blunt, the bulk of the advance in Crude Oil. Most recently, the South Korean Won has actually been going down against the Dollar. We show this on our next graph in which the Won is actually advancing when the Won curve declines, and falling when it rises. The weakness in the South Korean Won has been steady since last October, bottoming about two weeks ago, (see lower right hand portion of the chart). The upshot for South Korea during this period of time is that the Oil price advance has actually been magnified over and above the advance seen in Dollar terms. In South Korea, the annualized Rate of Change for Oil prices as expressed in South Korea Won terms is now over 100% per year; that's a lot of upside price pressure in the pipeline and the kind of thing which will breed cost-push inflation.
In the next chart, we show Oil prices as expressed in terms of Taiwan Dollars again, using a year over year Rate of Change. Again, energy prices are moving up at an incredibly steep rate of change, now well north of 75% year over year. When you stop and consider how much manufacturing takes place these days in China, South Korea and Taiwan, we are talking about a very serious inflationary pass through, which will be forcing up prices and likely depressing final demand for some time. As a result, there is a good chance that the strong economic growth statistics seen in recent years from Asia will begin to slow in the months ahead, with some economies in that region potentially yielding to recession. For global equity investors, this could be quite a downshift in the transmission, a message which last night's decline seems to signal loud and clear.
Above: South Korean Won (thick black line upper left to lower right) and Oil prices in US Dollars (thin line), and in South Korean Won (thick black line toward upper portion of the chart).
Below: Rate of Change of Oil prices in South Korea Won
Above: Rate of Change of Oil prices in Taiwan Dollars - very high
In my work, I regularly watch the Hang Seng Index as a proxy for emerging Asia, and at the moment the index appears poised to be resuming at least a medium term decline. In the chart below, we see one of two potential Elliott counts, in this case, the more immediately bearish of the two. Under this interpretation, the Hang Seng traced out a five wave decline from the high at 31,600 last October into the low seen at 21,084 in March of this year. This was then followed by a text book 50% retracement into the high seen on May 6th at 26,262. With prices now back below the 200 day moving average, there is a possibility that a much larger "C Wave" decline is now getting underway, a decline which would likely equal or exceed the previous A Wave decline.
Since Wave (A) in this count measured 33.35%, the measured downside move to achieve equality would target the Hang Seng Index down to values near 17,516 likely seen in the fall of this year. The somewhat less bearish alternate count would instead view the decline from last October's high into the January low as a three step decline, a classic A-B-C. Under this alternate view, the larger (B) wave is now unfolding as a five wave (A,B,C,D,E) symmetrical triangle. In this count, Waves A, B, and C are already complete. From here, the implication would be that Wave D to the downside is now in force targeting a retest of the March lows in the low 21,000 range. That would then be followed by another multi-week bear market rally back up toward 25,000 into the late summer/early fall at which point the larger B Wave triangle would complete and Primary Wave (C) down would be ready to commence.
Even under this second "alternate" count, the market still faces a very long bear market decline dead ahead. The difference is one of timing, a more immediate collapse, or a collapse deferred; either way, the recipe is one loaded with pain. While there are many ways to "spot" the elusive second leg BEFORE it unfolds, one approach we favor is to focus on repetitive market dynamics and look to incorporate the aspect of TIME as a market analytical tool. All too often overlooked, many analysts would do well to study the Time Span aspects of various capital markets. In the case of the Hang Seng Index, a directional benchmark for all Asia, we show the index and a set of bands on the next chart in which the bands are representative of a 52 week New High or New Low price for the index. When the index makes a new high, the upper band shifts up, and when it reaches new lows, the lower band shifts down.
Above: the Hang Seng Index with 52 week Maximum and Minimum
In the next chart, we apply a Time Span Counter to the Hang Seng which asks the question, how long has it been since the Index last tagged the lower band? As can be seen by the bulging move in the Time Span counter, thru last night it has now been 1,260 days in which the Hang Seng Index has NOT seen a 52 week new low. Since all markets are given to bouts of euphoria and fear, New Highs and New Lows are a regular event. What the chart on the bottom clip tells us is that the Hang Seng Index is at present, historically overdue to be making a set of 52 week New Lows and moving down to the lower band. For the time being, that is all we care about. Directionally, we know that the path of least resistance is likely down, and down to the tune of at least 16% as the lower band closed last night at 20,387 with the index ending at 24,402. In addition to a bearish outlook on the Hang Seng, virtually all of the other Asian equity markets are in the process of failing at critical resistance area�s including the South Korean Kospi, the Nikkei 225 and the Singapore Strait Times. This would seem to be a good time to be removing capital from the high risks of the international market arena.
Above: the Hang Seng is now overdue for a trip down to the lower band, implying the next major move will be down to the tune of at least 16%.
Above: the Singapore Strait Time Index with MACD
Above: the Nikkei 225 with MACD just crossing down and prices exhausting at the declining 200 day moving average.
Finally, when we look at potential catalysts for a further global market equity slump, we continue to return to the ongoing debacle seen right here in the USA in the financial sector. It seems not a day goes by without at least one or two major financials moving sharply lower, sure signs of major negative headlines just ahead. We end with a snapshot of re-insurance monolines, Ambac (ABK ) and MBIA (MBI) both of which continue a disastrous collapse. As of last Friday, the market was on the alert for a Moody's downgrade from AAA to AA status for both monolines, a move which could be the last straw for these badly beaten, over-levered businesses. At risk in a Moody's downgrade, more capital destruction in the 2.60 Trillion dollar municipal bond market and another shoe falling in the ongoing credit crisis.
Above: MBIA (MBI) in final collapse phase
Above: Ambac (ABK) in death throes
At the close, the DJIA ended with a gain of 2.85 index points to finish at 12,283.17, while the S&P 500 lost 3.32 index points to finish at 1358.44. On the NASDAQ, the NASDAQ Composite closed lower by 9.87 index points to finish at 2449.59. Both Bonds and Gold were sharply lower, with nearby August Gold down $28.20 to finish at $869.90 while the 10 Year Bond yield spiked higher, closing with a yield of 4.10%. That's all for now,
© 2008 Frank Barbera