SINGAPORE (July 8): Three important developments came out of the G20 meeting held at end-June in Osaka. The first was an extended ceasefire in the US-China tariff war. This was hailed as a victory for the US, but closer examination suggests the Chinese gave away little of importance. It is a classic example of the Chinese strategy of making something out of nothing. Expansion of US meat imports would have happened in any case, given the ongoing culling of Chinese pigs, owing to the breakout of African swine fever. This G20 outcome had the benefit of making a necessity look like a concession.
Presidents Donald Trump and Xi Jinping merely agreed to no further escalation in hostilities and, even then, only on a temporary basis. There has been no scaling back and no clear path to resolve the dispute. The US market reaction reflects hope rather than reality.
The second development was widespread support for the World Trade Organization against US depredations. Originally proposed by Indonesian President Joko Widodo, the proposals were backed by Australia and others. It is a small step towards recognition and acknowledgement of the damage being inflicted on world trade. In particular, it may lead to demolishing the US roadblock that has stalled the appointment of appellate judges before their terms expire on Dec 10. Support for the operation of WTO echoes China’s robust support for the global trading system that Xi first expressed at Davos in 2017.
The third development was the sting in the tail that slipped by almost unnoticed. This is the continued weaponisation of the US dollar-denominated trade settlement system. When trade transactions are settled in US dollars, the transaction commonly goes via a third party — a co-respondent bank. The international SWIFT settlement system allows your Singapore dollars to be converted into US dollars to pay your US supplier. It is the global system that allows your bank to make the conversion of your Singapore dollar purchase from Amazon into US dollars.
By convention, this system has been above politics. Not anymore. Trump has used exclusion from the SWIFT system as a way of imposing secondary boycotts against companies he claims are working against US interests. The first to feel the pressure were European companies engaging in business with Iran under the UN-approved conditions. Trump’s unilateral imposition of sanctions on Iran were further enforced by excluding these European companies from being able to settle contracts in US dollars. US banks, in compliance with Trump’s executive orders, would no longer act as counterparties to the SWIFT transactions.
During the G20 meeting, it was announced that the Shanghai Pudong Development Bank — China’s ninth biggest — runs the risk of losing access to US dollars and thereby being shut out of global finance. This exclusion affects all international business done by the bank, not just their business with Iran.
Late last month, a US judge found three Chinese state-owned banks in contempt for refusing to cooperate in an investigation into North Korean sanctions violations. They now run the risk of exclusion from the dollarised settlement system. That affects all their business activities with all their customers.
The implications of the secondary boycotts and the weaponisation of the dollarised trade settlement process have yet to be fully understood. Investors need to closely watch developments, as these are business-busting weapons.
Technical outlook for the Shanghai market
The Shanghai Index breakout reached our projected target of 3,040 before developing a retreat. The target was calculated using the triangle pattern projection and was independently confirmed by the historical resistance level near 3,040.
Traders and investors watched for the short-term Guppy Multiple Moving Average to move above the long-term GMMA because this is confirmation of a new sustainable uptrend. A pullback from resistance near 3,040 is expected, along with a period of consolidation prior to the next upmove.
A rebound from support provides an entry signal for a continuation of the uptrend and a breakout above 3,040, with a move towards 3,300.
The first support feature is the value of the lower edge of the short-term GMMA near 2,978. Movement between the lower and upper limits of the short-term GMMA group of averages is part of the normal progress of trend development. A rebound from the lower edge of the short-term GMMA is a buy signal.
The underlying trend support feature is the value of the longterm GMMA, which has compressed and turned upwards and is beginning a very small expansion. The narrow separation in the long-term GMMA provides a support base.
The potential for uptrend continuation is confirmed by the relationship between the short- and long-term groups of moving averages. The value of the lower edge of the short-term GMMA is above the upper edge of the long-term GMMA. This is usually a confirmation of a successful trend breakout.
The breakout target above 3,040 is calculated by observing historical resistance levels. There are currently no chart patterns that enable a confirmation calculation of this target.
The trend continuation target is near 3,300, which has been tested as a resistance level multiple times since 2016. The recent rally in April peaked at 3,278, just short of the 3,300 historical resistance level. Traders watch the GMMA relationship to develop a better understanding of the trend strength and character.
The initial breakout rally from support near 2,820 was confirmed by a relative strength index divergence pattern. This is a very reliable trend change indicator for analysis of the Shanghai Index. Now, the RSI is showing a trend confirmation. The trend line on the index is moving up and the trend line on the RSI indicator is also moving up. This confirmation relationship is not significant. Traders do not use the RSI for insights into the new trend development. The RSI becomes significant again in the future if an RSI divergence pattern develops.
Daryl Guppy is an international financial technical analysis expert and special consultant to AxiCorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as ‘The Chart Man’. He is a national board member of the Australia China Business Council.
