It is an eventful week ahead in China, with both the second quarter GDP release and major bilateral trade talks with the USA on the docket. China’s National Bureau of Statistics (NBS) is announcing GDP figures for Q2 at 1:30 GMT on Monday. We will then pivot to what is sure to be a consequential discussion as China and the United States hold trade talks on Wednesday.
With respect to the Chinese equity markets, our bias is that this week holds the potential to add energy and velocity to the overall structure of the bullish moves we have seen on the China A50 recently, but traders will need to carefully monitor the news as it emerges from China, as this week holds opportunity in the form of major event risk.
It can be assumed that the GDP number released on Monday could provide a basis for conversation through the week, especially if there is a surprise on either side of the consensus forecast. Most analysts expect a number in the 6.6% to 6.5% range, which is in line with current China GDP trending.
China quietly announced last week that they made a change in their GDP calculation for the first time since 2002. This announcement has surprisingly received little notice given its potential for major impact on the quarterly GDP number. Now included in the calculation will be the effects of tourism, health care, and ‘new economy’. Our opinion is that this change might not be adequately rolled into forecasts, and consequently not fully priced in by markets, with the assumption that a higher than expected GDP number will positively impact the China A50 equity index this week. We expect the possibility for a number in the 6.7% to 7.0% range, with risk to the topside, attributable to the new calculation methodology, lower energy prices and Yuan values, and broad sector and trade growth.
In the lead up to this week’s events, the China A50 has enjoyed a ferocious bull run in the first half of this year. The GDP data and following climate around the trade talks would seemingly need to be sufficiently negative to propel a reversal.
Over the last month, the China A50 index has continued to work its way higher, while the rest of the globe wrestles with broad geo political risks and central bank policy decisions. In an important technical development that can be seen on the below chart, the mid-June resistance in the China A50 Index is now serving as a platform of support, which is providing the structure for the ascension of the pricing, as the Index has also broken above all positive Ichimoku indicators on a 4-hour chart.
A main driver for China of course is the value of the Yuan relative to the US Dollar. The inverse correlation with the China A50 Index and the Yuan has resumed as the direction of broader market volatility has turned higher. The blue line below is the Yuan value, the candles are the China A50 index, and below that in green is a look at the Relative Volatility Indicator.
The A50 index has also enjoyed a historical correlation with the MSCI emerging markets index. As the bullish momentum has strengthened in the near term for the A50, we have seen Yuan values and market moves as well as the MSCI trend all come into alignment. This structure, combined with the dynamic breakout across Ichimoku indicators, provides us insight that with a GDP print of 6.6% or higher this could be a longer trend with exit velocity from current ranges to move another leg or two higher in the near to medium term.
This week provides several possibilities for a binary trader considering a strategy with the China A50. A trader unsure of the direction of the GDP print, or its directional impact on the market, could simply pursue a volatility straddle and buy a contract long on the upper side of the current pricing distribution and sell a position on the lower side of the A50, essentially buying the volatility the news could bring and possibly capitalizing on an expectation for large swings either way. Monitoring Yuan values and trending as well as the MCSI Emerging markets Index would be beneficial as well for a binary trader as it could provide some insight on shorter term price action in the China A50.
Our directional expectation is for possible continued moves higher conditional upon a meaningful possibility for a better than expected GDP print, partially attributable to a new method for the NBS as well as lower energy prices and Yuan values and their positive impact on GDP. If the print is inline with expectations, we could see a basis for some retracement off of last week’s highs early in the week , with the possibility for additional trending higher in the mid to late week window on the back of the trade talks.