For this week's edition of the SIA Equity Leaders Weekly, we are going to look at China equity through the iShares China Large-Cap ETF (FXI) which tracks the FTSE China 50 ETF. In addition to this we will take a look at the Crude Oil Continuous Contract (CL.F) as we head into the OPEC meeting today where they will be discussing whether or not to continue the group wide production cuts and provide support for global oil prices.
iShares China Large-Cap ETF (FXI)
On Wednesday, Moody’s Investment Services Inc. downgraded China’s debt to A1 from Aa3 which marks the first downgrade for the country since 1989. Moody’s cites two factors weighing in on the country’s credit metrics. First, the slowing potential growth in the economy in combination with policy targets that are higher than potential growth. As a result, they believe the economy is reliant on policy stimulus to propel the growth which will need to be funded through higher leverage. The combination of these two factors, according to Moody’s poses some contingent risk for the country over the intermediate term.
It is a unique time for the Chinese economy with Chinese policy makers being aware of the growing leverage. Due to this, Moody’s expects that the leverage, while still increasing, expects leverage increase more slowly than it has in the past. In addition to the debt situation, US-China trade relations going forward will be important to keep an eye on for further guidance as to where the Chinese market may go.
Now looking at the FXI chart, we can see that FXI bounced off intermediate-term lows back in February last year and broke above the long-term downtrend line at the end of 2016. This uptrend continues to be intact and has been pushing through some resistance levels. The next areas of resistance to watch are ~$40 and ~$42. Support for FXI comes in at $35.36 and ~$33. With an SMAX of 9 out of 10, FXI is showing near term strength versus the asset classes.
Crude Oil Continuous Contract (CL.F)
Oil closed at $51.36 on Wednesday leading up to the OPEC meeting which starts today in Vienna. The consensus expectation is that there will be a nine-month extension of the current production cuts which is scheduled to end next month if there is no extension. Iran, who has been opposed to the plan in the past is also on board as the production limit set for them is very close to their max capacity.
Inventories fell for the seventh week in a row according to the U.S. Energy Information Administration (EIA) where stockpiles were down 4.4 million barrels for the week ended May 19th, compared to analyst expectations of a 2.4 million barrel drop. The American Petroleum Institute (API) also reported a supply drop of 1.5 million barrels. Total inventories sit at 516.3 million barrels which the EIA considers to be in the upper half of the average range for this time of year.
In looking at the crude chart, we can see that the recent price movement is still well within recent historical trading ranges with strong resistance at the $55 level. A move above this could signal strength to the $60 range. Support comes in at $45.16 and also around $43. CL.F currently has a 5 SMAX score which shows there is little short term relative strength versus the broad asset classes.
In an interview with Bloomberg, Bank of America’s Francisco Blanch believes that OPEC can no longer control oil prices. In 2014, they started a price war with U.S shale producers, Canadian oil sands, and deep water exploration, however, the production cut that began last year signalled the end of that price war. He believes the exit strategy now for OPEC's supply side price support is trying to force the oil market into backwardation where futures prices are below spot prices which they hope will put pressure on US shale producers who are selling most of their production forward. This is an interesting take on the current market dynamics and we will see how the price of the commodity moves in the coming weeks and months as the battle between supply and demand continues.
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