This decline, the buying-opportunity advice hit the mark: "The Market Trend"

Publication date: 2017/08/16 08:12

Trend 349: China's seriousness—a question mark

First, the position.
During yesterday's trading session (12:23), the premium on sold put options we held (75 yen) was urgently circulated in a “buy at 32 yen, sell at 33 yen” state, but the standoff at this level persisted past 14:30, and the low at 32 yen in that period, and the Osaka daytime close rose smoothly to 37 yen (which, in a general VIX-like description, would be “up 14%”). Following the results of two U.S. indicators released at 21:30, the dollar rose, and Nikkei 225 futures also rose 80 yen from the Osaka close price of 19,740 yen; at that moment the premium briefly met at 30 yen, but ultimately this morning at 5:30 the evening close was 38 yen.

The rebound in the Nikkei 225 yesterday was driven by high-priced, large-cap stock movements, with the cash market aligning to the futures price. In such cases, futures buying-back tends to be the market’s core driver, but last week there were changes in the futures positions held by foreigners and foreign-capital firms. Tomorrow (and beyond) in the “trend,” I will explain this week’s buyback situation as well.

What drew attention in the preceding night’s European and U.S. markets was a WSJ article about the retreat of North Korea risk. Secretary of State Tillerson and Defense Secretary Mattis both stated they would continue diplomatic talks. And what further reduced market risk during Asia time yesterday was WSJ’s electronic edition reporting that “Kim Jong-un, after hearing the plan, will refrain from missile attacks around Guam and will continue to monitor U.S. actions.”

Among this sequence of upheavals, there have been several unprecedented oddities.
First, North Korea carefully explained that it would finalize a plan by mid-August to drop four missiles over Shimane, Hiroshima, and Kochi in Japan, and land them near Guam. Second, U.S. government officials admitted that there have always been direct, behind-the-scenes negotiations with North Korea. And third, WSJ was able yesterday to report in detail that North Korea had postponed missile attacks.

Now, China and Russia, said to hold the keys. Russia is currently ignoring the cooler relations with the United States, but after President Trump hinted on the 14th at “IP infringement investigations” and tariff increases under Section 301, China yesterday proceeded to halt imports of coal, iron, and seafood from North Korea. While many market participants view this action as aligned with the UN Security Council's additional sanctions, there is a sense of “?” remaining.

I had not included this in the trend, but personally I even entertained a skeptical view that perhaps China and Russia are actually hoping something occurs between North Korea and the United States that weakens U.S. power; thus I evaluate yesterday’s Chinese action as showing a stance, but it remains a “?” nonetheless.

That is, “What? you’re still importing coal from North Korea?”

This UNSC sanction is only an “additional” one. It targets testing of ICBMs, and last year there were already sanctions in response to five prior nuclear tests; China should have complied with that.

The previous sanctions consisted of two components: the trade amount for two months in November-December, and the trade amount for one year in 2017 (the former and the latter). Around February 20 this year, China declared that as it was approaching the latter figure, it would stop importing coal from North Korea going forward. I personally wondered whether they had imported a year’s worth in a month and a half, but this “stoppage” announcement seems to implicitly acknowledge that imports continued after the February declaration.

Incidentally, regarding the “former” two months, the UN stated that (if all countries had properly complied with sanctions) North Korea exported about 3.5 times the amount that could be exported; the UN did not name the importing countries, but everyone looked toward China sideways, needless to say.

All of this, taken together, remains a “?”.