Shanghai flag pattern breaks 20-year support, pulling other markets with it!
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Could a slow down in China not only impact other Emerging markets, could it ripple in the U.S.? The above 4-pack reflects that the Shanghai index is breaking support of a multi-year flag pattern, with the bottom of the flag pattern, being a support line that has been in place for 20-years.
The 4-pack above reflects that the Hang Seng index is breaking support along with EEM and VWO, two of the six largest ETF’s in the U.S.! Don’t overlook the potential ripple effects and impact on markets in the U.S. if these flag breakdowns continue to push lower!
China: a bull market for credit default swaps
The recent cash crunch in China’s banking system is a contributor to a massive move in the country’s five-year sovereign credit default swap, from 66.93 basis points at the beginning of the year to 143.02 bps at the end of Q2.
However, it is just a symptom — not a cause — of a larger economic slowdown in China.
Why should investors care that Chinese CDSs had such a move, even though they still are at half the levels of the swaps of developed markets like Italy or Spain?
The U.S. credit markets first showed a massive economic problem brewing under the surface as early as February 2007. If an investor didn’t know how collapsing mortgage structures were resulting in skyrocketing CDS prices back then, an investor would think everything was “fine.” An investor unaware of the monstrous move in CDS’ in early 2007 would not know that later, such credit market developments would result in record banking system losses that nearly took down the whole system.
The Chinese CDS move in 2013 is a record 113.68% — the largest such relative move of any sovereign issuer — although a consultation with a bond expert confirmed that one should not be looking only at percentages, but at the total number increase of basis points.
So in this case, Chinese CDS rose 76.09 bps in 2013, while other major BRIC countries registered similarly impressive moves. Brazil’s CDS rose a larger 88.77 bps in 2013 to end the first half at a higher (more risky) 200.20 bps, while Russia rose by an even larger 91.55 to end the first half at an even higher than Brazil rate of (riskier) 224.25 bps. India doesn’t have sovereign CDS due to the low level of U.S.-denominated debt, but the State Bank of India (used as a proxy) has CDSs that are about double those of Russia and Brazil, indicating it is the riskiest BRIC country. For comparison, U.S. CDS dropped over the six-month period by 10.34 bps to end at 30.34 bps, indicating that U.S. credit risk fell .
A Disaster Waiting to Happen: China Deliberately Hiding Economic Financial Data And Banks Are In Deep Trouble And They Are Telling Media To Stop Talking About It!