This week I will be taking a deeper look into the China economic problem that has started gaining attention from stock traders and also the financial media.
The primary reason I want to focus on this topic is that it was arguably the major catalyst behind the crypto crash this week, plus it's also topically relevant if you trade stocks, commodities, or any other financial instrument.
I think the chances of the Chinese economy imploding are low, but that does not mean that financial markets won't continue to sell off as traders and investors panic.
Following a streak of disappointing economic data releases from China (contraction in exports and imports) plus the Evergrande news things look grim for the world's second-largest economy.
Plus, several commercial banks downgraded China's GDP growth forecasts for the year. Indeed, the stock market is primed for more losses as traders turn bearish on China.
Earlier this week Beijing decided to suspend the release of monthly data altogether. This gives an indication of how bad the slowdown might be.
US-based companies doing business in China stand to lose if the economy there continues on a downward trajectory.
With tech stocks and crypto being correlated, this is one of the reasons why a big sell-off in the Nasdaq and the S&P500 could hit Bitcoin and altcoins.
US private equity and venture capital investments in the country hit an eight-year low last year and continue to fall, according to data from PitchBook.
Large hedge funds like Michael Burry’s Scion Asset Management also cut their exposure to Chinese companies in the second quarter of 2023.
Could China in fact be a reason why Burry famously went short the Nasdaq and S&P500 with amazing timing this week, as he foresaw the market taking notice of the pending slowdown?
So what next? The Chinese central bank meets next week, and the market will probably be on hold for any news that a stimulus package is coming from China.
I suspect that global stock markets will continue to drop as the central bank do not very much for the time being but manage the falling Yuan, which recently hit a 16-year low against the greenback.
The big risk is an uncontained financial crisis in China has the potential to side-swipe the capacity of both the government and asset-rich global citizens to spend.
It would also obliterate some export sectors that rely on China. This has the potential to produce a deep recession in first and third-world economies.
In short, the market knows this, it's essential a forward-looking pricing mechanism, and that's why risk-on asset classes are selling off.
As mentioned in my daily articles, keep an eye on Copper prices for a true indication of how bad things could get for China if the red-metal falls in the coming week.
Copper's 200-week moving average at $3.66 is the level to watch. For the record, bears have not cracked this level yet, despite a solid test earlier this year.
On-chain data shows that Bitcoin's sell-side risk is still ultra-low, however, I'd make the argument that crypto has never seen a proper global recession COVID-19 crash aside).
In terms of the technicals, if Bitcoin takes out this week's swing low anytime soon, then $22,00 is up next.
Following that, sustained weakness below $22,000 and BTC looks vulnerable technically.
On the flip side, and something to watch carefully over the coming weeks is the possibility that if we did see any fears over the global banking system during this potential crisis then Bitcoin would probably start to get bought aggressively, and maybe from more attractive price levels.
