SINGAPORE (July 1): The world is waiting for the outcome of the meeting between Chinese President Xi Jinping and US President Donald Trump at the G20 meeting on June 28 and 29. This has become the main course on the menu but the real substance in the G20 is the momentum generated by Prime Minister Lee Hsien Loong’s statements at the Shangri-La Dialogue meeting a few weeks ago in Singapore. Momentum has been added by Indonesian President Joko Widodo. Recently, Australia too added its weight to this push, finally acknowledging that despite its so-called special relationship with the US, the collateral damage from Trump’s unilaterally declared trade war was dangerous on a global scale. Japanese Prime Minister Shinzo Abe is reported to also be supportive.
Lee’s statement was more nuanced than the megaphone stoushes favoured by some other countries. Global economic prosperity does not depend upon the victory of one side over another. It depends on the web of trade relationships that connect smaller countries with each other and with each of the economic giants. Like it or not, the World Trade Organization is a central part of this relationship. It is the WTO structure of sometimes irritating rules and regulations that is the glue that holds together the smooth operation of trade, trade financing and trade settlement.
These are vital foundations upon which rests the economic success and aspirations of Singapore, Australia, Malaysia, Indonesia and others in the region. Strong defence of the institution of world trade has been a long time coming, but it has finally arrived at the Osaka G20 meeting.
To be sure, the media focus will be on the meeting between Xi and Trump. Some concessions are expected, be they delays in tariff implementation or increases in Chinese imports from the US. These are transactional concessions and do not go to the heart of the conflict between civilisations that frames the views held by US Trade Representative Robert Lighthizer and US National Security Advisor John Bolton.
Investors will focus on the reaction to Jokowi’s proposals because the success or failure of these will create the most significant impact on investment flows. Acknowledgement and endorsement of the role of the WTO signals a pause in the unravelling of trade relationships among mid-level countries. It is essential that roadblocks in WTO processes are quickly cleared. The most obvious is the appointment of new appellate judges so that the 100-plus outstanding WTO disputes can be arbitrated. Resolution of these disputes opens trade, provides certainty and enables trace development. This has an immediate impact on your investment in companies as diverse as commodity producers, agricultural assets, manufacturing exporters and financial providers.
Ideally, alongside this acknowledgement of the legitimacy of the WTO will come an acceptance of some firm proposals for WTO reform. Visitors to Shanghai, Beijing and Hangzhou marvel at the modern development and wonder how China has still retained its developing country status. Visitors to Xinjiang, Yunnan, Gansu and Heilongjiang are appalled at the deep-rooted poverty and understand exactly why China retains its developing country status. Working constructively with the WTO to develop a solution is a better response than walking away from the WTO.
In assessing G20 outcomes, we need to watch the main course, but we should not ignore the real substance of the entrées.
Technical outlook for the Shanghai market
The Shanghai Index breakout stalled after last week’s strong momentum. The pullback and test of support areas are the normal behaviours in a breakout from a long period of downtrend activity. The strength and sustainability of the trend is assessed with reference to the support features because these provide a stable platform for a rally rebound and trend continuation.
The primary support feature is the value of the long-term Guppy Multiple Moving Average. This group of averages is used to represent the way investors are thinking. Wide separation shows strong agreement and support for the trend. Narrow separation indicates more caution in trend support.
The long-term GMMA has compressed and turned upwards. This is often associated with a bullish change in the trend direction. At this stage of trend development, the narrow band of separation in the long-term GMMA provides a support base. The uptrend breakout and trend continuation are confirmed if the index successfully uses this as a support feature.
The bullish nature of the market is confirmed by the relationship between the short- and long-term groups of moving averages. The short-term GMMA is used as a guide to the way short-term traders are thinking. The value of the lower edge of the short-term GMMA is above the lower edge of the long-term GMMA. This is also often associated with a successful trend breakout.
The trend rebound and continuation are confirmed first by a rebound from these support features. They are confirmed second by a rally that moves above the recent highs at 3,013.
The breakout activity is further confirmed by the Relative Strength Index signal. The RSI values continue to rebound from the up-sloping trend line on the RSI display. It is important to note that the RSI divergence signal has now ended with the Shanghai Index breakout above the downtrend line. The RSI is now providing confirmation signals where the new uptrend in the index is matched by continued uptrend behaviour in the RSI. The RSI is an oscillator indicator, so it will inevitably retreat from its extreme values above 80. This retreat will be assessed against other indicators applied to the index to determine if a new trend reversal signal is generated.
The breakout target near 3,040 calculated from the triangle pattern is independently confirmed by other features on the Shanghai Index chart. The Shanghai Index has a historical resistance level near 3,040. Traders and investors watch for a rebound rally and the short-term GMMA to move above the long-term GMMA because this is confirmation of a new sustainable uptrend.
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
