THE END OF TECH !
The Technology Sector and The Nasdaq Index were the driving force of the 2009 -2018 bull market. The Index rose sevenfold and it was the last component of the US equity market to mark a top for this cycle.
This was done last week and the US 2009 -2018 has now finally topped out “
But the most significant piece of news and one that will have significant implications forward was the Facebook data confidentiality breach and the pressure that is mounting from every corner on the unquestionable leaders of the 2010s equity rally.
Suddenly, the magical economic model and quasi-monopoly of the FAANGs is being questioned and investors start having doubts about their ability to sustain the high growth rates and profitability they have been enjoying until now.
France launched a legal action against Apple and Google for their monopoly on the diffusion of Apps.
Facebook is being legally challenged for their massive breach of data confidentiality with Cambridge Analytica and Mark Zuckerberg is now being questioned by the US Senate and requested to testify in Europe. The Company is also being challenged for their practice of unilaterally changing their terms of use without notice or without the prior consent of their users, a practice that goes against all the principles of contractual law but the standard practice of the industry.
Uber was forced to suspend all its testing of driverless vehicles after a fatality involving one of its test cars in Tampa.
The European Union is considering imposing a sales tax on the revenues of all the Tech giants based on the residency of the users instead of the jurisdiction of the service provider.
And last but not least, Donald Trump adventurous protectionist policies against China could backfire extremely severely if the US tech giants were to become the targets of retaliation.
But the most telling sign that something serious is happening is the charts of the FAANGs below.
From a technical standpoint, ALL these companies have recorded a MAJOR TOP last week and have now become compelling shorts for hedge funds and active traders.
BAIL OUT OF TECH !
and the turning point is not limited to the US if one is to judge from the huge volatility of Tencent, the high flying Chinese operator of Wei Bo, Last week.
Tech was the last shoe of the Equity bull market to drop. The global Bear market will start unfolding in the next few weeks. Stay tuned !
The Trade War initiated by Donald Trump with China will prove to be just another aspect of the secular shift of global leadership from the USA to China.
Like with North Korea, the outcome will not be what America expected, but exactly the opposite, it will re-inforce China’s economic dominance and Donald Trump has just offered Xi Jing Ping a golden opportunity to show China’s clout on the world economic scene
Imposing US$ 60 Billion of tarifs and singling out China and Japan while excluding Europe and the rest of the world was not the best way to reduce America’s trade deficit.
Moreover, it amounts to clear declaration of war in times where wars are no longer waged with military force but with economic power.
As was the case with North Korea, the Trump Administration made spectacular announcements and used a very loud and aggressive rhetoric, flexing muscles and trying to solve issues by intimidation, and as was the case with North Korea, China remained much quieter and refrained any escalation.
Their announcement of US$ 3 Billion sanctions against Us products was just an opening shot, an indication that it would not remain passive while keeping the door opened to negotiations and peaceful resolution of the problem.
But China is not going to stay there and Donald Trump is now facing the difficult choice of a humiliating turn-around or the prospects of Chinese actions that will end up extremely damaging for the US economy at large.
China, of all cultures, is not one to be confronted by force and threats, and certainly one where losing face is the worst that can happen.
Anyone believing that China will remain put or abide by the American diktats is living in Cuckoo Land.
And China has a lot of weapons to play with, and most will be extremely damaging for US corporations and the US economy.
First, China may instruct its airlines to gradually stop buying Boeing airplanes. It probably won’t come as an announcement or an official policy, but the end result will be the same. China’s own aviation industry is now coming of age and this could be a great opportunity to encourage the shift from US built aircrafts to Chinese built aircrafts.
China is, by far, the largest and the fastest growing market for the aviation industry. 487 million domestic and international journeys made last year in China, according to data from the Civil Aviation Administration of China (CAAC). Even more impressive is how quickly the market is growing. The number of trips made last year increased by 15 %, according to CAAC.
The surge in air travel has been fueled in large part by middle class Chinese who are spending billions on domestic and foreign vacations. With a population of 1.4 billion, the trips add up: Analysts predict that China will surpass the U.S. as the world’s largest commercial aviation market by 2030.
As recently as last September, Boeing estimated that the country will need a trillion dollars worth of new airplanes over the next two decades, including more than 5,100 of the same size as the Chinese made C919. Most of that money would have been destined for bank accounts at Boeing and Airbus.
Donald Trump just offered China the opportunity to shift that money faster towards the new competitor on the block. With 168 seats, the C919 competes directly against the Airbus’s A320 and Boeing’s 737–800. Tough luck Boeing and its workforce…
Second, China may start making it more difficult for US-made cars to be sold in China. Technological requirements, certifications, communication, safety reports will all be part of the arsenal that can be used to impose Soft tariffs rather than confronting the hard ball game.
There again, China happens to be the world largest market for vehicles and the fastest growing one. It is also the fastest growing market for Electric vehicles, one of the strategic priorities of GM and Ford for their future.
Curtailing the access of their market to US manufacturers will have devastating consequences for the US car industry in the long term, and there again, it will accelerate the shift of Chinese consumers towards locally-made brands and accelerate the investment initiatives of Chinese car-makers in Europe and Asia.
Though luck Detroit and its US workforce…
Third, China may start making it more difficult for Apple to sell its iPhones in China, based on security concerns, and it may also make it more difficult for Apple to source components in China.
There again, China is the largest an fastest growing market for smartphones and laptops and HuaWei would love the opportunity to take a larger slice of the market.
Tough luck Silicon Valley and its workers …
Fourth, China WILL make it more difficult for US banks to enter the Chinese Market, precisely at a time where China announced it would allow foreign banks to operate in the domestic market and where it officially opened the 24 Trillion domestic payment market to foreign firms.
This was one of the most strategic and most important priority of the US banking system and they had been lobbying for years if not decades to get to this very juncture. Slowing down the process, imposing disclosure rules, capital ratios and management requirements that go against the US regulatory environment and banking culture is extremely easy to do and US banks would miss the boat of what is to become the largest banking market in the world.
Tough luck Goldman Sachs, JP Morgan, wells Fargo and Bank of America, and their US workers …
But besides all these examples of targeted soft sanctions, China has extremely powerful macro-economic tools at its disposal and these will have massive repercussions on the US economy and on the US standing in the world economy at large.
The first is a legal action at the WTO that will either end up in a humiliating condemnation of the United States of America, the Champion of free capitalism, for restricting free trade and free capitalism, or the opening of a legal Pandora Box that will question the entire construction of the free-trade environment that has benefitted the world for the past 40 years and that will ultimately favor China by eliminating its obligations to open its own market, the largest consumer market of the world.
The second, is the offloading of the US$ 1.1 Trillion of US treasury bonds held by China as part of their foreign exchange reserves and reduced participation in new issuance of US Treasury debt. And it so happens that is is taking place at the exactly the time where china was scratching its head to reduce it foreign exchange reserves without upsetting the markets or its trading partners.
Donald Trump just gave China a golden opportunity to speed up the process while blaming theUS for it.
But the ultimate impact will be a global increase in US interest rates and therefore higher financial cost for US corporations and less Growth and less jobs for Americans at large.
Confronting the next world largest consumer market and your largest creditor nation in NOT a successful strategy… and anyone thinking that Donald Trump offensive will be without lasting consequences does not really understand China.
As an illustration, we would like to share here a video of Zhang WeiWei of Fudan university that says it all and will help people understand better what is taking place in China and why we are Selling the US and Buying CHINA ( see SELL AMERICA, BUY CHINA THE BIG SECULAR SHIFT IS NOW ).
We have developed many time in the past why the Chinese Model of governance could prove to be superior to the US model and why the Chinese believe it is… Please listen… it is worth it
And as every week, we shall review the main equity markets in Charts.
The 2009–2018 equity bull market is over and the bear phase has actually started….
Stay away from equities for the next few months, or trade them actively
World Indexes
MSCI World Index
The technical configuration of the MSCI World is definitely negative. After the major top recorded in January 2018, the rebound was contained, yielded a double top and last week’s break-down below the short and medium term Moving averages indicated that the second leg of the bear phase is underway. The uptrend in place since February 2016 was broken in January and the index did not manage to trade back above it. In the coming weeks, the Long term moving average should be broken and a major death cross registered on the Short and Medium Term Averages.
MSCI Emerging Markets Index
The technical configuration of the MSCI World is also negative although less so than the one of the MSCI World Index. The uptrend in place since December 2016 is currently being tested and some Emerging markets are showing more resilience than the mature equity markets. Nevertheless, this is not a trime to be invested and any rebound will now be taken by investors as an opportunity to reduce exposure.
MSCI Asia Pacific Index
The technical configuration of the MSCI Asia Pacific Index points to a sharp fall ahead. Liquidity tightening has never been good for emerging markets and the sharp fall in the US markets on Friday will entice US institutional investors to reduce risks and divest from external markets. Moreover, the trade war between the Trump Administration and China will have significant repercussions on equity markets where corporations are largely manufacturers for US corporations.
For now, China has taken a very gradual approach to sanctions, imposing tariffs on only US4 3 Billion worth of imports and threatening to take legal action at the WTO and to consider offloading its massive portfolio of US Treasuries. China wants to give Donald TRUMP time to re-assess and cancel some of the measures. Any escalation in the retaliation measures could have a devastating impact on markets such as Taiwan, Korea and India.
USA
Dow Jones Industrial Index
The last two trading days have definitely confirmed the bear phase and that the Buy on dip mentality has been broken. The correction will see the index fall at least another 10 to 20 %. Technically, it is yet too early to call the end of the secular bull market in US equities, but the combination of a major top, extreme valuations, tightening liquidity and the prospects of a trade war — let alone a military conflict in the Middle East — calls for prudence.
Standard & Poors 500 Index
The failed break out of the initial triangle and the forming of a double top is a sure sign that the next direction of the Index is down and it is difficult to see any significant support before the 2'100 level. We expect a rebound next week but remain very cautious for the beginning of April.
Nasdaq Composite Index
The Tech sector and the Nasdaq were the only sector/index that had not recorded a final top in January 2018.
In fact the index tried to make a new record high at the beginning of March, but that attempt failed, giving a very negative SELL signal. In fact it was a very unusual situation as for a very few days, the Technology sector became the largest segment of the US stock market, surpassing the traditionally dominant financial sector.
Short term we expect a rebound this week, but the damage of the Facebook story to the technological sector is considerable and pressure is now mounting form all angles on this over-valued sector.
China
CSI 300 Composite Index
The Chinese main index corrected 15 % from its January peak already but is still within in its secular uptrend. We see more downside in the short term but expect the Chinese Government to intervene to stabilize the market and for the market to remain in its secular uptrend. It is yet too early to re-invest massively in Chinese equities, although a nibble buy on weakness strategy is warranted for the end of the year rally we expect.
HSCEI H-Shares Index
The Hong Kong listed Chinese H-Shares index should test the 11'000 level before rebounding. Financial companies have started reporting their results and stocks are quite cheap. Weakness ahead should be taken as an opportunity to accumulate Chinese H-Shares above 11'000.
Indonesia JCI Index
The Jakarta Composite Index fell 12 % from its peak after having recorded a significant double top. The Index is getting heavily oversold in the short term and a bounce is possible, but the correction is not over.
Philipines Composite Index
The Manila Composite Index has definitely broken its uptrend and has more downside before the bear phase is over. The market is oversold short term but any bounce will be limited and it is yet too early to bottom fish
Taiwan Stock Exchange Index
The Taiwan Stock Exchange has been quite resilient until now, as it is highly geared to technology stocks. However, the events of last Friday and the significant breakdown in the US technology sector could change the picture significantly. The uptrend is not yet broken but the completion of a lower top indicate that the bear phase is ahead. Next week will be crucial for the future direction of Singaporean equities.
Singapore Straits Times Index
The Singapore Straits Time Index is still in its uptrend channel and has been resisting quite well overall. Next week will be crucial for te future direction of Singaporean equities.
Europe
Bloomberg European 500 Index
The technical configuration of European equities is ugly and they are probably ahead of the pack in the global bear phase that we see unfolding over the next few months. The 2016 uptrend was broken in January and since then the index of the 500 largest European companies has lost 9 %. Europe is being affected by the strong Euro and its economy is already giving signs of slowing down again.
We remain on the sidelines for now and expect the index to fall by another 10 % before a bottom can be made.
German DAX 30 Index
German stocks are consolidating after the initial down phase but seem ready to fall further. The positive agreement on a German governing coalition was not sufficient to lift the market significantly and even the avoidance of tariffs did not trigger a bull reaction.
We remain on the sidelines for now and expect the index to fall by another 10 to 20 % before a significant buying opportunity appears.
France CAC 40 Index
The 2016 uptrend in French equities is definitely over and there is no momentum on the upside. The CAC 40 recorded several lower highs and are now testing an important support at 5090. A new sell signal was recorded last week and we expect further downside after a short rebound this week.
Spain IBEX Index
Spanish equities were heavily affected by the Catalonia saga in 2017 and have fallen already 11 % since their May 2017 peak at 11'000. The Catalonia problem is now probably over with the arrest this week-end of Carles Puidgemont in Germany, but the bear market in Spanish stocks is not yet over.
Investors should refrain from bottom-fishing at this stage and should patiently wait for the formation of a solid bottom before re-entering this promising market for the long term.
Italy FT MIB30 Index
Italy has been remarkably resilient since the beginning of the year, despite its debt problem and the political uncertainty that surrounded and came out of the last elections. Nevertheless, the 2016 uptrend is now broken and the index finds it difficult to sustain levels above its moving averages.
It is only a matter of time before the long term moving average that has served as support is broken to the downside. We expect the index to fall another 10 to 20% before a significant bottom is made.
Investors should refrain from bottom-fishing at this stage and should patiently wait for the formation of a solid bottom before re-entering this promising market for the long term.
Athens Stock Exchange Index
Although we are bullish for fundamental reasons on both the Greek economy and stock markets, and although the 2016 uptrend has not yet been broken here, the correction in Greek stocks is not over yet.
The 750 level must be watched carefully and a break to the downside of the uptrend will point to another 150 points fall.
We monitor this market carefully as we are waiting for the right entry point for our strategic positioning.
Currencies
EURO
As argued many times in the past few weeks, and contrary to the views of staunch EURO bulls such as Goldman Sachs and ING, we expect the EUR to start depreciating markedly in 2018 and the trading pattern in place since the beginning of 2018 amounts to an important secular top in the upward move that has started in January 2017.
As showed in our long term charts before, the US Dollar is still in a structural advance that will last until 2020 and the 2017 downside correction is now nearing its end. We could see the EUR try to test its previous highs in the coming two to three weeks but doubt that it will surpasse the 1.26 level.
The market is extremely long EUR and a return of volatility and the the unfolding of a global bear phase in equities will trigger a flight to quality and repatriation of capital towards the USA.
Japanese Yen
For reasons that are only known to hedge fund traders, Buying the Japanese Yen is seen as a risk-off trade without any consideration to fundamentals. It was ironic to see the Yen appreciation when North Korea sending ballistic missiles over Japan….
The fact of the matter is that real interest rates are negative in Japan and will stay that way for quite some times. As such it makes it a currency of choice for anyone wanting to leverage portfolios and what probably happens is that when traders de-levarage their positions, they also buy Yen to reduce their borrowings.
At some point though, the Bank of Japan will need to break this pattern as a strong Yen, and even more, a volatile Yen, is not what the Japanese economy meeds at the stage. We were a bit early in calling a short at 106.54, but maintain that position structurally. We could see a final burst of strength in the short term, but the reversal will be violent.
Commodities
As always, Goldman Sachs is touting Oil with a target of US$ 70 at a time where speculators are massively long Oil futures while demand is far from being strong.
There is no doubt that a withdrawal of the USA from the Iranian Nuclear accord — something we expect to happen in the coming two weeks — and the implementation of new sanctions against Iran will divert Iranian Oil supply from the mainstream market.
However, the impact on supply will be extremely limited as Iran already has direct agreements with buyers for most of its oil and the opening of the Shanghai Future market in Yuan last week will also provide a new outlet.
On the fundamental side, Shale oil output is growing at a phenomenal pace while petrol and diesel cars should become a rare sight on European and Asian roads by 2040 as manufacturers adopt zero-emission technologies and the cost of buying electric vehicles gets ever cheaper.
Traditional combustion engines made up virtually all European car sales in 2015, a proportion that will shrink to 20 percent by 2035, the European Climate Foundation said in a report last month. Conventional vehicles will completely disappear from garage forecourts five years later as automakers embrace a rangeof hybrid and electric technologies.
As a result of the drop-off in petrol cars, vehicle carbon dioxide emissions will plunge 88 percent by 2050 from current levels, reducing exposure to harmful air pollutants that are responsible for 467,000 deaths in Europe a year.
The European Union currently imports 89% of its crude oil, the majority of which is used for transport fuel. Replacing the oil with EU-produced energy would save 49 billion euros ($61 billion) on imports in 2030, the ECF said.
As was the case in 2008 when they propel oil prices to 148 and in 2014 when they pushed it to 120, Goldman Sachs is enticing speculators to buy a commodity that has no fundamentals behind it. The turn around will be sharp.
Originally published at Mechelany Advisors.
