Hang Seng Index: Oversold-led positive animal spirits overshadowed curren...

• The Hang Seng Index has transformed into a medium-term uptrend signifier with cardinal enactment astatine 17,110.
• Momentum origin is present taking a beforehand spot implicit fundamentals specified arsenic the deflationary hazard spiral.
• A softer than-expected China CPI and PPI prints for April whitethorn further erode user confidence.
• A yuan devaluation cannot beryllium ruled retired to offset anemic home request via a boost successful export maturation that tin spark a currency war.

This is simply a follow-up investigation of our anterior report, “Hang Seng Index: Potential currency warfare whitethorn footwear commencement different bearish leg” dated 25 March 2024. Click here for a recap.

In an abrupt crook of events, aft being the worst-performing banal marketplace successful the satellite since 2022, the large benchmark China and its proxy Hong Kong banal indices reversed up successful April and adjacent outperformed the highflying exertion and artificial quality (AI) heavy weighted US Nasdaq 100.

A much pronounced outperformance tin beryllium seen successful the Hong Kong benchmark banal indices wherever the Hang Seng China Enterprises Index gained by +8% successful April followed by Hang Seng Index (+7.4%) and Hang Seng TECH Index (+6.42%) portion the China CSI 300 recorded a smaller summation of +1.9%.

In contrast, the Nasdaq 100 and the MSCI All-Country World Index exchange-traded money were battered with monthly losses of -4.5% and -3.5% successful April.

Momentum origin and under-positioning are apt the cardinal catalysts

Fig 1: Key China thematic equities ETF / MSCI All Country World Index ETF ratios arsenic of 9 May 2024  (Source: TradingView, click to enlarge chart)

The ratios of cardinal China-related equities exchange-traded funds (ETF) listed successful the US; iShares China Large-Cap (FXI), Invesco Golden Dragon China (PGR), and KraneShares CSI China Internet (KWEB) implicit the MSCI All-Country World Index ETF (ACWI) person seen their large underperformance stalled successful precocious January 2024 arsenic these ratios managed to find enactment astatine their respective precocious October 2022 plaything lows.

Thereafter, the 10-week rolling momentum origin of these ratios has turned affirmative concurrently successful the week of 25 March 2024 which successful crook triggered the affirmative momentum feedback loop (see Fig 1).

Also, according to the Bank of America Merrill Lynch money manager’s survey conducted successful aboriginal April, respondents person highlighted China was the astir underweighted geographical portion successful their portfolios (net 13%). Thus, a picked-up successful affirmative momentum tin easy spark a FOMO (fear of missing out) induced behaviour owed to its grossly underweighted positioning that led to further rallies.

Can the rally successful the Hang Seng Index continue?

Fig 2: Hang Seng Index large & medium-term trends arsenic of 10 May 2024 (Source: TradingView, click to enlarge chart)

Fig 3: China user & shaper inflationary trends with USD/CNH arsenic of 10 May 2024 (Source: TradingView, click to enlarge chart)

For this week, the Hang Seng Index has continued to adhd to its gains arsenic it ended today, 10 May with a play summation of +4.7%, its 3rd consecutive week of affirmative instrumentality and a month-to-date summation of +6.8% for May that outperformed the Nasdaq 100 (+3.9%), and MSCI All-Country World Index ETF (3.6%) arsenic of 9 May.

In the lens of method analysis, the monthly RSI momentum indicator has staged a bullish momentum breakout beneath the 50 level. Also. it has yet to scope its overbought portion of 70 and supra which suggests that determination is inactive imaginable medium-term (multi-week to multi-month) bullish impulsive upmove series arsenic the terms actions of the Hang Seng Index transformed into a medium-term uptrend signifier via the bullish breakout of its erstwhile large descending trendline absorption from February 2021 (see Fig 2).

Watch the 17,110 cardinal medium-term pivotal enactment connected the Hang Seng Index with the adjacent medium-term resistances coming successful astatine 20,400 and 22,520.

The cardinal hazard that whitethorn derail the bullish code seen successful the Hang Seng Index is the revival of the deflationary hazard spiral successful China. Tomorrow, 11 May, we volition person the latest acceptable of China user (CPI) and shaper ostentation (PPI) information for April. In March, some the CPI and PPI inched little to 0.1% y/y and -2.8% y/y respectively which besides saw a decelerated maturation successful retail income successful the aforesaid period (3.1% y/y versus 5.5% y/y successful February).

If China’s user and shaper ostentation trends proceed to plummet little successful April, it suggests that the deflationary hazard spiral is inactive intact which successful crook tin pb to a further erosion of user assurance followed by a imaginable deceleration successful home request (see Fig 3).

To marque up for a tepid home request environment, China’s policymakers whitethorn opt for a devaluation of the yuan to boost export maturation that successful crook apt to trigger a currency warfare among nations that are babelike connected exports; specified beggar-thy-neighbour monetary policies are not conducive for a risk-on environment.

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