There is a lot that happened this past weekend! Brexit actually took place… after three and a half years (we’re not sure what to expect, but GBP strength would not surprise us). The World Health Organisation (WHO) declared the Coronavirus a Public Health Emergency of International Concern and we saw reports that 14,642 cases have been reported with 305 Deaths. Really not trying to sound callous, but odds are those numbers will be bigger by the time markets open. We’re seeing a very long list of airlines who are refusing to fly to China, a similarly long list of countries that have put travel restrictions in place to and from China. Interestingly, the WHO has not recommended that trade stop, so at least the ports are still open.
During the time that their markets where closed though, global markets have lost a lot of ground and Chinese markets likely have some catching up to do. The Hang Seng lost over 5% in two days after the Chinese New Year break ended and the FTSE China A50 futures came off around 6% since the last day that cash markets traded in China (mainland). Worth noting is that there are circuit breakers that will halt trade, should markets fall 10% or more in one single day. So assuming they catch up the 6% down, that leaves another 4% of potential downside before the Chinese markets will be forced closed.
Right now, we have no idea how bad, or good, it is going to be. Our expectation is that we will see heavy losses in Commodities and Commodities stocks, specially industrial metals. Luxury goods are likely to come under the hammer as well. This could be big. Emerging Market Currencies could take real strain. The key for us would be to see whether or not even more cases emerge over the next 12 hours. There are so many rumours; from the virus being a biological weapon that broke out, to it being planted purposely as an economic attack, and even that China is not reporting the real numbers and that the situation is a lot worse than what we are all aware. Sifting the truth from rumour is probably not even possible, so we’re going to just choose to be ready for whatever the reality might be when markets open on Monday.
Saying that, we really do need to be ready for everything because Chinese authorities have said that they would be conducting Open Market Operations (OMO) and will be providing ample liquidity. The first note, there are some 1tln CNY worth of Central Bank funding due, which is mostly expected to be rolled. The state said that they would ensure ample liquidity using tools, including open market operations… so do we see them just outright buying equities..? Wouldn’t be the first time.
It’s going to be wild tomorrow… get good sleep tonight.
Starting with the big daddy… things are not looking good. That trend line we were looking at on the daily chart last week seems to have broken. To us, this opens the door to a overall global market short-term correction. Perhaps a move down to the Moving Average indicated on the chart, or even that previous resistance (now support) level at 3028/3030? Momentum on two counts looks bearish. if this chart is anything to go by, we think it’s going to be a difficult week.
Risk off, Rand above 15 to the Dollar… banks are not looking sexy. Well, that depends on perspective… here we have the market darling bank giving us a sexy sell signal 😛
On a serious note though, decent risk reward here with momentum on two counts and relative strength all indicating lower inertia. A clear break on volume and a confirmed trigger. We like the CPI short for the coming week.
This setup looks really good, although did not give us an entry last week. We would like to sell around R111 and unfortunately MCG did not bounce high enough to give us an entry. We now find ourselves asking if this is a short worth chasing, or if we should just chalk this up as a missed trade..? We’ll likely keep our trigger orders around R111 and give it some time. We’re not going to chase if we don’t get a good risk-reward.
Kumba Iron Ore
KIO is a relatively complex one (at least for us). We were looking for an Inverse Head and Shoulders play a short while ago, but sadly the fear gripping the commodities market has not been kind to Iron Ore, or Kumba. Our thinking changed and we were looking for shorts on the weekly chart, but as is the case with the above, we might have missed this opportunity already. The setup is good on the weekly chart though; bearish divergence into a corrective ABC pattern, breaking key support and moving averages on the way. That IHS we tried to play, played us by blinding us to a great bearish setup. Once again, the question is, have we missed this trade?
Looking at the daily we note that the upcoming trend line support could act as a trigger for a longer-term short position as it would give us an opportunity to set a lower stop loss and perhaps get a favourable risk-reward. We’re not entirely sure yet what we are going to do with KIO in the coming week, but we will be watching that trend line support as well as momentum and the Chinese and commodity markets.
A bit a knee jerk trade if this ends up being taken. It just seems that with so much fear, the odds are good that we will see a weaker Rand and a higher Gold price… so it necessarily follows that local Gold counters will do well. GFI looks as it it is breaking significant resistance on the weekly chart.
One the daily chart, we’ve indicated some resistance levels. One left to do and we’re in multi-year high territory. It’s a choppy, gappy, horrible share to trade. We advise caution, wide stops and small positions if you’re getting involved with this stock.
*Please note that these trade ideas for part of a larger weekly plan and the value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources.