China’s producer prices deflate, ASX 200 squares up to resistance

China’s factory gate did something we have long forgotten was possible – and actually contracted for the first time since December 2020. Producer prices fell -1.3% y/y in October, down from 0.9% in September and well beneath the 1.5% consensus from a Reuters poll. Consumer prices also softened, rising jut 2.1% y/y from 2.8% previously, as COVID lockdowns and a weaker yuan saw demand for goods fall.

Whilst many Western economic will be enviously looking at China’s relatively low inflation numbers, there should be some comfort in the fact that lower prices for export nations can benefit all (at some point in the future). But with that said, China also has the lowest inflation level compared to many of its Asian peers, with the likes of South Korea, Indonesia and Philippines seeing annual inflation rates above 5-7%.

China A50 daily chart:

The A50’s downtrend has been long established, but it has produced a solid bounce from its multi-year lows and entered a countertrend move. Yet retracements rarely occur in one wave, and are usually at least three. So it is interesting to see that the market has pulled back for a third day, yet volatility is lower. And support has been found around the weekly and monthly pivot point.

We are therefore waiting for a break above today’s high to suggest the next leg higher of its 3-wave retracement is underway. An initial target is the Feb 2022 low, a break above which brings the 12,650 and 13,000 resistance zones into focus. A break of daily close beneath the weekly pivot point invalidates the near-term bullish bias.

ASX 200 daily chart:

The ASX 200 is on track to close higher for a fourth consecutive day – and its 10^th bullish day of the past 12. And the contrarian in me is questioning on those metrics alone as to whether the ASX is now due for a pullback.

Furthermore, its rally has stalled near an important resistance cluster which includes the 200-day MA, swing high and monthly/weekly R1 pivot point. Volumes over the prior 4 days were below average, so failure to close above resistance today risks triggering a retracement.

But as the OBV (on balance volume indicator) is trending higher with prices and broke above its own August high ahead of prices, it shows stronger underlying demand. So I suspect the ASX will go on to break above 7,000 sooner or later.

How to trade with City Index

You can easily trade with City Index by using these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.