What does the chart show from a technical perspective?
The above chart is the Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR). This exchange traded fund tracks the performance of the CSI 300 which are the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges. This ETF is a good gauge of how the Chinese stock market is performing.
I have charted its Relative Strength (denoted by the green line) versus the SPDR S&P 500 ETF (SPY). SPY is responsible for tracking the performance of the S&P 500. By comparing these two ETF’s I am doing a comparison between the top stocks in the Chinese stock market and those in the United States market.
The Relative Index has been on a significant decline ever since March, which happens to be the same month that President Trump imposed the first round of tariffs on China. This sharply declining Relative Strength for ASHR shows that the S&P 500 has greatly outperformed the Chinese markets over the last six months.
We also notice a bearish crossover in mid-April when the 50-day Moving Average (blue) dipped below the 200-day Moving Average (purple). This indicates negative momentum for the price of the ETF.
However, there are also some bullish signs that can be found from this chart. The Relative Strength Index (RSI), which is the chart second from the bottom, is at a current level of 39.84. This signifies that the Chinese market is currently oversold and should see at least a slight improvement in the near future.
Along with the RSI, another bullish signal is the noticeable increase in volume over the last 3 months. Volume levels have been far higher than previous rates excluding the outlier in early February. An increase in volume means that more people have wanted in on the Chinese markets over the last few months and this signals that many see this as the bottom of the dip for ASHR.
How has this affected U.S. markets?
As can be seen in the chart above of ASHR (top) and SPY (bottom) these two ETF’s that represent their respective country’s stock markets have run almost identical paths over the last three years. This is the case until April of this year. Directly following President Trump’s decision to impose tariffs on China, ASHR has significantly declined and SPY has continued its upward ascent.
How will this affect U.S. markets moving forward?
This July data showed that the U.S. GDP increased at a 4.2% annual rate in the second quarter. This was the highest growth rate we have seen in four years. However, moving forward many expect that growth rates will slow and much of this is due to trade tensions with China. As can be seen in the comparison of ASHR to SPY, the S&P 500 typically moves in line with the CSI 300. The last six months have been an unusual circumstance due to a tariff battle in which China has much more taxable exports than the U.S. does. This is the reason that China’s market has slowed while the U.S. has continued to grow at a very high rate. It could be argued that the U.S. has leverage in this trade war as of right now due to the fact that China is an exporter of far more goods than the U.S. However, the United States has taken a hit from the tensions with China in the past week as the S&P 500 took a nearly 10% loss. If the United States and China both want to see growth moving forward a deal must be made in which the trade tensions between these two nations can be muted.
The trade war has upset a system in which both the U.S. and China were growing at a steady rate. President Trump clearly felt that we were being taken advantage of by the Chinese and that we were not experiencing optimal economic growth. However, the slowing of China’s economy does not help us. If a deal can be had between China and the U.S. in the near future I anticipate that the U.S. will get the better end of the deal as we have the leverage in the battle as of right now. In this case, the tariff battle will have been worth the volatility over the last six months. Having said that, the longer this trade war goes on the more the United States and China will lose.