Main asset classes Technical corner 40 | 41 Further weakness ahead for US inflation expectations to Chinese equity markets move lower during 2023 We believe that Chinese equity markets are set to perform poorly into the We believe that US 10-year Breakeven Inflation Expectations (BEIs) are set to first half of 2023, resuming the aggressive downtrend that began in early move lower in 2023, which we believe should eventually cap the upside in 2021. Hong Kong is expected to lead the way, where the Hang Seng Index nominal yields. has established a multi-year top. The MSCI China and the Shenzhen CSI 300 indexes already reached new lows for 2022. This negative outlook is further reinforced by breadth and volume indicators, as well as the weakening of the This outlook is based on the confirmation of a large A major top in US inflation expectations is expected CNY relative to the USD. Importantly, we also see a range of important nega- and significant technical “head and shoulders” top to eventually limit the upside potential for nominal tive sector stories. pattern in 10-year BEIs. Realized inflation readings bond yields going into 2023, although this is only remain high at this point and falling inflation expecta- seen likely to occur once BEIs start to fall in a more tions may be hard to envisage. However, we believe meaningful way and we also see technical evidence that markets are forward looking, and that this major that 10-year US real yields may have peaked, in the top is signaling that the market is pricing in a higher view of our technical analysts. The market that continues to give us the most For the Shenzhen CSI 300 Index, the beginning of chance of a recession during 2023, which would in concern is Hong Kong, where the Hang Seng Index 2022 saw a large and important “head & shoulders” turn bring inflation sharply lower. With all this in Finally, we note that high and rising inflation has has removed pivotal long-term support seen from top established to mark, in the view of our technical mind, the market is holding initial support seen at the resulted in weak performance across most traditional the YTD low and 2016 lows at 18279/235. This analysts, a long-term change of trend lower, with the 38.2% retracement of the 2020/22 up move at asset classes in 2022, with bonds and equities has established a multi-year top to warn of a market falling sharply until the end of April. While we 208 bp, however we look for a break below here in remaining unusually well correlated as both suffered long-term change of trend lower with some signifi- continue to see scope for further consolidation at our due course, with the next supports seen at 200 bp, large drawdowns. We believe a fall in inflation cant fresh declines already seen in October. This next objective/support at 3503 – the key low of then 182/177 bp, with the measured top objective expectations is likely to help restore a more normal recent weakness has left Chinese equities highly 2020 – we see no technical reason not to look for a below here at 150/146.5 bp. With realized inflation negative bond/equity correlation in 2023, which oversold and we see scope for a consolidation break in due course, with support then seen next at still high, we do not expect this level to be reached should trigger a large top in the US equity/bond phase toward year end to unwind this overstretched the 61.8% Fibonacci retracement of the entire uptrend quickly. Key resistance is seen at 258 bp. ratio, resulting in a large underperformance of condition. With major tops seen in place, though, from the 2008 lows at 3259, then the long-term equities over the next 3–6 months. this will be seen only as a temporary pause ahead of uptrend from the 2008 lows, currently at 3155. an eventual resumption of the core downtrend back to 14560 and eventually our objective at the 61.8% A further recent negative factor for Chinese equities retracement of the rise from 1974 at 12885. has been the sharp weakening of CNY/CNH relative to the USD, as we typically see these The recovery seen in the MSCI China Index post the periods as a headwind for the equity market. We March low earlier this year was capped ahead of its view the current weakness as corrective, and we falling 200-day average, and downside pressures continue to look for USD/CNY to rise further over quickly resurfaced in October, with the index moving the next 3–6 months, with next resistance seen at below its March low potential neckline to a multi- 7.42/745, which is a long term 61.8% Fibonacci year top from October 2011 for a brief move below retracement level, then 7.780. the 2016 low at 47.99. With the decline already leaving the market highly oversold, we similarly see scope for a fresh consolidation phase. Should 47.99 be removed, this would be seen confirming a multi-year top and an even more significant change of trend lower, with support then seen next and initially at the 44.48 low of 2011.