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Chinese exports have been a gauge for world economic activity for years now. This past week, they took a big hit, raising concern about trade and growth around the globe. HSBC added its voice to the rising tide of voices that a sharp stock market pullback is imminent. Opposition to a bailout of troubled largest German bank Deutsche Bank continued to mount in Europe. Everywhere you turn, you see reasons to keep and add to your retirement precious metals holdings.
China Exports and Imports Plunge
The Chinese economy is usually one of the strongest growth engines in the world. This past week, it became clear this growth has stalled. Both the Chinese export and the import figures for September looked much worse than forecasts predicted. Demand for Chinese goods proved to be weak both overseas and at home. In dollar terms, this led to a 10 percent sharp drop in Chinese exports at the same time that imports declined by 1.9 percent. The economic powerhouse's trade surplus dropped to $41.99 billion. Analysts had expected exports to decline by a far more moderate 3 percent and imports to increase by 1 percent as measured year on year with a trade surplus of $53 billion, per the analysts polled by Reuters.
Yifan Hu the UBS Wealth Management CIO and Chief Economist opined last Thursday, “Domestic demand is equally weak as global demand.” She observed that absent the dramatic rise in oil prices from September 2015's $30 per barrel to this past month's $50 per barrel, the imports numbers would have looked even weaker. This data has appeared with a backdrop of a significant six year low level made in the yuan to dollar exchange rate recently. The currency is also significantly lower against China's other trade partners' currencies. This has led many analysts to conclude that slower economic growth for China and as a result the world will follow. The World Trade Organization is predicting the growth level of global trade will come out at below 3 percent for the fifth year in a row.
“The data we have so far suggests that a drop (in) import volumes of a number of key commodities, including iron ore and copper, are partly responsible. This could be an early sign that the recent recovery in economic activity is losing momentum,” said Capital Economics China Economics Julian Evans-Pritchard on Thursday.
HSBC Technicians Warn of Extremely High Chance of Stock Market Fall
In light of the Chinese economic data from this past week, a new warning from HSBC technical analysts is more ominous. The British banking giant increased their warning outlook on the American stock markets to “red alert” after Wednesday's aggressive selling with the note “the possibility of a severe fall in the stock market is now very high.” This is not the first hint of caution from HSBC on the markets. In their September 30th report, they raised the rating to “orange alert” because of the trading patterns they saw developing in the Dow Jones Index that resemble those immediately before the 1987 stock market “Black Monday” crash. Here is the chart for the DJIA before, during, and after Black Monday:
HSBC makes the convincing case that the “head and shoulders” pattern seen just before Black Monday is now evident in the Dow Industrials. They demonstrate in the chart below that this pattern has been both tested and re-tested. What makes this significant is that the head and shoulder pattern theory states that if the place in which the two lower bookends from the shoulder has an unsuccessful retest, the resulting trading pattern is significantly lower prices. Last Wednesday's broadly based sell off showed “intense selling pressure,” which led the bank to ratchet up its stock market alert level. Thursday's opening saw the Dow plunge another 150 points to reach its lowest point since July. The levels to watch as critical pivot points per HSBC analysts are 17,992 on the Dow and 2,116 on the S&P 500.
Head of Technical Analysis for HSBC Murray Gunn wrote Thursday, “As long as those levels remain intact, the bulls still have a slight hope. But should those levels break and the markets close below (which now seems more likely), it would be a clear sign that the bears have taken over and are starting to feast.”
Gunn is not only looking at the topping pattern with his analysis. The deteriorating momentum is a further indicator that the bulls could soon lose their grip on the market. While he is not certain when such a loss actually might happen, “with other technical analysis evidence pointing to a potential significant top, the price action should be monitored closely over the next couple of weeks.”
Opposition to Bailing Out Deutsche Bank Growing
It begins to appear more and more likely that a bailout will be necessary in order to save Germany's largest lender Deutsche Bank from collapse. Bloomberg Markets' Alix Steel observed that the cost of insuring the debt of Deutsche Bank for the short term has increased substantially as measured against the longer term. The stock price has fallen from its 2014 high level of $52.27 to $11.85 last week. The bigger fear revolves around who is exposed to the derivatives of the bank and who may be in for shocking losses if the institution does collapse.
Despite the growing need for a savior for Deutsche Bank, the opposition to such a move is only growing around Europe. Banking and political establishment voices are increasingly in agreement on their proclamations that they will no longer provide bailouts to the banks that are “too big to fail.” The latest voice against such bailouts came from German Bundesbank board member Andreas Dombret who stated, “State support of banking sector must end. Size is not a goal in itself. Neither is the size of a single bank a guarantee for their survival, nor can the size of the sector as a whole protect it from crises.” It is beginning to sound like investors had better look for another hero besides Germany or the European Central Bank to rescue Deutsche Bank. The European banking system stability and future may depend on it.