China optimism buildin

With the U.S. equity markets closed for the President’s Day holiday overnight, it was left to markets in Asia to set the trading tone for the early part of the week. Quick to take the opportunity, Asian equity markets rallied to their highest level since October last year. Gains supported by the ongoing positive sentiment emanating from last week’s U.S.-China trade negotiations in Beijing as President Trump confirmed on the weekend that talks were “very productive” and President Xi agreed “important progress” had been made. Trade talks are set to continue this week in Washington.

Also, supporting the Asian equity market rally was the large-scale liquidity injection into the Chinese economy in January by Chinese authorities. Data released on Friday showed China’s Total Social Financing rose to a record RMB4.6trn in January, a number that well exceeded market expectations of RMB3.3trn. Total Social Financing is closely watched as it provides a broad measure of credit and liquidity in the Chinese economy, as it includes off-balance sheet forms of financing, such as initial public offerings, loans from trust companies and bond sales.

As the chart below shows, Chinese authorities typically inject liquidity into the system each January ahead of Chinese New Year holidays. That said, the larger than expected number this year suggests authorities are becoming increasingly proactive in their measures to prevent the economy stalling further in 2019. With Total Social Financing numbers expected to remain robust, the Shanghai Composite, a useful gauge of the local markets mood given it is controlled by domestic traders, outperformed the region to finish +2.68%.

The mood and outlook in China, aside from being important to the fortunes of the local equity markets, also impacts the other markets which fall under the umbrella known as the China complex. Two weeks ago, we outlined the prospects for two of the China complex, Copper and China A shares to continue their January rally. With China A shares today testing and thus far failing to break through the top of their range, 12000 area, it is a good time to consider raising the stop loss on any long positions. My preference now would be to square up longs and then wait for a break and daily close above 12000/12100 as technical confirmation the recent rally can extend and as a catalyst to reconsider opening China A share longs.

Likewise, for copper which overnight was unable to test, let alone break above 6-month range highs at 2.8800ish, despite India’s Supreme Court overturning a previous decision which would allow Vedanta Ltd. to restart its shuttered 400,000-tons a year smelter. Instead at current levels in copper, I would prefer to now be square and waiting for a break and close above 2.8800ish to confirm that a push towards 3.000 and possibly 3.2500 is underwa