Walking A Fine Macro-Monetary Line In China

Yesterday's 'bounce' in the markets can be attributed to a technically oversold condition, with reconciliation today back to the downside across most assets, specifically North American and European Equities. This renewed selling pressure again synchronized the shorter time structure (hourly) with the longer time periods (Daily and Weekly) all re-aligned today to the downside.

And coming off the data details in China yesterday which saw headline inflation tick up month over month again, supported by a rise in all the components. This adds to the heightened anxiety around coordinated 'jasmine' rallies, as social unrest increases due to the disparity gap of rich and poor, causing Premier Wen Jiabao to jack up minimum wage by 20%. But, the labor market outlook in China is also showing 'cracks' with expectations for hiring in Q3 2011 falling from Q2.  When we consider the trend towards growing urbanization over the years tied into the theme of an expanding manufacturing base and export economy, a weak labor market report in conjunction with rising consumer price inflation sends a chilling message to the Premier.


 And, looking deeper into the trade dynamic, it is evident that the rate of change of commodity import demand continues to erode, specifically relating to Copper imports, which declined significantly in the month of May, adding to the belief of global industrial 'softening'.

Inflationary pressures across Asian countries, such as Vietnam, Malaysia, Philippines, India and China over the past few months, have resulted in capital shifts in currencies, domestic equities and government debt in the form of downside pressure in these markets and in line with renewed strength in the US Dollar Index.

Above, we can observe the relative weakness on display in the FXI China 25 Index ETF (Black line) versus the Dow Industrials (Red Line) on a weekly basis since 2008. Look at the lack of participation on the part of the FXI (Black Line) as the Dow (Red Line) extends to make new highs in 2011. This lack of confirmation by the FXI seems to be signalling something about uncertain economic slowing coming out of China.

Yesterday, we were stopped out of our short NQ (Nasdaq mini) position, but today's reversal back below the the 3 Day Pivot re-aligned the structural time frames (Weekly, Daily, Hourly) all short, and according to our rules, suggested a re-entry on the short side of the nasdaq in line with the structures.

The arrows above show the Exit and re-entry today. Our risk is contained by the pivot structure on the hourly chart.