MorningWord 9/30/14: Conscious De-Coupling

by Dan September 30, 2014 9:46 am • Commentary

So this is probably where you start hearing the term de-coupling again. Yes I know, that’s so 2011/2012, when it was commonly used to suggest that the U.S. could weather the European sovereign debt crisis, as our banks had already been through years of de-leveraging since our own homegrown financial crisis of a few years earlier.  This time around the term will be used to suggest how the U.S. will buck the trend of a continuing slowdown (or merely risk asset weakness) in emerging markets.  In the last week, we have seen an amazing divergence in Chinese equities as those in Hong Kong have plunged, while those in the mainland have chugged right along.

After making new 52 week and 5 year highs, the Hang Seng index in Hong Kong has dropped nearly 10% since Sept 3rd as a large portion of the island’s population is protesting in the streets.  It’s interesting to note that the drop has seemingly halted at the uptrend that has been in place since the lows in 2011:

Hang Seng 5 yr chart from Bloomberg
Hang Seng 5 yr chart from Bloomberg

Over on the mainland, the Shanghai Composite, which just a few months ago was flirting with new lows below the all important 2000 level, is now butting up against what can only be described as epic technical resistance at 2400, the level the index broke and has been below for most of the last 3 years:

Shanghai Composite 5 year chart from Bloomberg
Shanghai Composite 5 year chart from Bloomberg

This divergence likely the result of China opening up A shares in Shanghai for the first time in October, per the WSJ:

Even after rising 12.5% year to date, the Shanghai Composite Index is still down 60% from its 2007 high. Its average price/earnings ratio of 9.6 is half of its 10-year average, making it the cheapest market in Asia by that measure, according to the Marco Polo Pure China Investment Fund.

To help revive the market, Beijing is bringing in foreign help. The Shanghai Hong Kong Connect, a program set to kick off in mid-October, will allow foreign investors to buy some 568 stocks in the Shanghai Stock Exchange through Hong Kong brokerage accounts, subject to an annual total quota of $48 billion.


Meanwhile, in two of the other BRIC countries, Brazil and Russia, the equity indices are making new lows for entirely different reasons.  In Brazil, investors have sold stocks as Dilma Rousseff’s chances to win another presidential election have risen in the past month.  Jason Karaian of Quartz summed up the moves:

The prospect of a second Rousseff term—which would mean 16 years of unbroken rule by the Worker’s Party—appears to be unsettling traders, with stocks and the real falling sharply today, extending losses this month that have mirrored the gains that Rousseff has made in the opinion polls. The real recently touched a five-year low against the dollar, and Brazil’s benchmark stock index has shed 10% so far in September:

Screen Shot 2014-09-30 at 9.25.25 AM


EWZ hit its lowest level since March on yesterday’s large gap lower, and the Brazilian equity ETF is indicated lower once again this morning.

Finally, while Russia has remained out of the headlines, the Russian ruble has continued to make new all-time lows vs. the dollar, including this morning.  The Russian equity etf, RSX, made a new multi-month low yesterday as well:

RSX daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg
RSX daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

Even though valuations are extremely cheap for Russian stocks, the political risks of confiscation and further conflict are serious and real.

Three of the largest emerging market economies are flashing red alert in the risk asset arena, at the same time that the S&P 500 index remains 2% from all-time highs.  De-coupling indeed, but de-coupling usually resolves with re-coupling.