Markets are a little wary of the implications of China’s devaluation yesterday, combine that with uncertainty around the Fed’s upcoming interest rate hike and mix in European/American summer liquidity and you have a slightly uneasy, conflicting set of market moves yesterday. A day does not make a trend and doesn’t always have to make sense; particularly at turning points. All will be revealed in good time. Equities did not like the possibility of a currency war, ending the day lower pretty much across the board- except in China. Bond yields were generally lower as they mulled the possibility of the Fed postponing its rate hike, given the China news. Commodities were soft, with Oil down sharply and the metals following. Gold was steady.
Anybody following my New Platinum Service, it lost 125 points yesterday and is now ahead by 475 points in August. The previous two months showed a gain of 1810 and 3045 points respectively.
But, the currency markets were more mixed and not displaying a wholesale risk off move. Asian FX was weaker and dragged the AUD with it. Overnight the Yuan has weakened by another 1.6% and sits a new multi-year low of 6.22 to the US Dollar. The G10 FX group was relatively steady, while EUR outperformed as news of a Greek bailout deal is coming together and despite poor ZEW data. The US Dollar was flat. So, do we get a currency war? What’s happening? China surprised markets by devaluing its currency by 1.9% and changing the way the currency is ‘fixed’ or set each day to allow for slightly more market orientation. This represents an easing of China’s economic policy but also generated a round of depreciation of regional currencies; including the AUD. Markets are watching to see if the CNY continues to depreciate from here. Officials have noted that the move does not represent a trend, but if the new fix methodology is adhered to, as noted, then we should see further weakness today which has now happened with the lower fix at 6.22 as mentioned above.
The FX market is worried that, despite China’s real appreciation this year, that CNY weakness from here would lead to competitive depreciation in trade competing countries. In that case, some countries would inevitably have relatively stronger currencies – and tighter financial conditions. The last thing markets need is a race to the bottom for their currencies, it is destabilising. This is why there is a sense of unease after yesterday’s move. It may not come to that, and indeed rarely does. But, it’s summer, this is new, China is a big influence and the Fed is at a turning point. Markets are inevitably wary. We can expect a degree of nervousness. The AUD is typically used as an Asian proxy, and as such it was not a surprise to see AUD sell off on the day. Over time, China’s move may be seen as the monetary easing measure it represents, which is growth positive and good for demand for what Australia provides to China. But it might be too soon for markets to take that view right now.
The devaluation of the CNY hit the German DAX particularly hard yesterday as it closed down 2.7%. This morning following another devaluation on the Yuan by 1.6% has seen the DAX open 1.25% lower. The US Stock markets lost an average of 1% yesterday and the Futures markets are again trading lower this morning following the Yuan devaluation.
This morning on the economic front we have UK Average Earnings and Unemployment at 9.30 am. This is followed at 10.00 by Euro-Zone Industrial Production. At 12.00 pm we have US MBA Mortgage Applications. Then at 3.00 pm we have the very important JOLTS Job Openings which is a particular favourite indicator that Fed Chair Janet Yellen watches closely. Finally at 7.00 pm we have the US Monthly Budget Statement.
September S&P 500
Initially my S&P plan did not work out yesterday as the market traded lower to my 2082 buy level before stopping me out of this trade at 2076. I must say when I wrote my commentary yesterday I did not envisage that the ‘Open Gap’ from last Friday/Monday at 2072/2086 would get filled yesterday but that is exactly what happened with the S&P making a new low on the day at 2070.50 which enabled me to go long aggressively for a second time at 2072. Following a nice rally into the close I was able to cover this long position at 2080 as outlined earlier to my Platinum Members and I am now flat. The rally in the S&P continued until we got the Yuan fix overnight which saw the S&P fall 20 Handles. Yesterday’s move lower has now left another ‘Open Gap’ from Monday’s close at 2099 to yesterday’s Chicago day session high at 2088.50, while already this morning we have a 15 Handles down gap. I must say I am getting very worried about the US Stock market. For example yesterday’s move lower was on increasing volume. Apple shares are down 13% since July 21 while Alibaba is down 19% since May and now down 23% since it went public last September. These are big moves. The S&P is testing its 200 day Moving Average this morning and remember a break and close below 2035 could see a massive move lower as this level has already held six times so far this year. Given the huge move lower in the Futures market I am very tempted to buy this market as I look for this ‘Open Gap’ to be filled as it is extremely rare that the S&P will leave two ‘Open Gap’s on consecutive days. For this reason I will be a small buyer on any further move lower to 2052/2059 with a 2047 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer in front of 2037 with a tight 2031 stop. With the S&P trading at the bottom of its Bollinger Band my only interest in selling this market is on a close of this down gap today at 2078/2083 with a 2087 stop.
EUR/USD
I have been calling this Euro higher nearly every day for the past 10 weeks but unfortunately the market has just missed my buy level over the past two days and I am still flat. The next main resistance for the Euro is at 1.11 while the major resistance comes in at 1.1450. If we break this latter level we could well see a move to at least 1.18 which is the 38.2% retracement of the whole down move from last year. My own view is the US economy is slowing and if this Yuan devaluation continues then we may not get a Fed Rate hike this year. This is certainly not priced into the US Dollar and is one of the reasons why I am so bearish of the Dollar at this time. Today I will move my buy level higher to 1.1030/1.1060 with a 1.0995 stop.
September Dollar Index
As I have written over the past two months the Dollar is having major difficulty in breaking the key 98.00/98.50 pivot level. I am still flat the Dollar and today I will lower my sell level to 97.25/97.55 with a 97.90 stop.
September DAX
Yesterday my DAX plan did not work as shortly after I posted the DAX traded lower to my 11455 buy level before very quickly stopping me out of this trade at 11390 and I am now flat.. Thankfully I am only playing in small size in this market and that I had a tight stop. Yesterday was another great example of how important it is to have a stop in each market that you trade. The move lower in the DAX has just been incredible over the past two days with the market down over 550 points in that time. Presently trading this market is like been in a casino as the moves are just so volatile. The DAX is still up nearly 15% for the year and when you compare this to the US Stock markets which are now down for 2015 it is very hard to make a bullish case for this market especially if I am right and the Dollar starts to weaken from here. For this reason I am going to use any rallies to try and get a short position on board but I will start in very small size given the volatility. Today I will be a small seller on any rally higher to 11150/11210 with a 11330 stop. I do not want to be long the DAX at this time.
September FTSE
Just as I posted the FTSE got hit hard to the downside with the market trading lower to my 6640 buy level before eventually stopping me out of this traded for a small loss at 6610 and I am now flat. The FTSE which traded to a high of 6642 overnight is now trading at 6520 as volatility again picks up. These are incredibly dangerous markets. Today I will be a small buyer on any further dip to 6450/6480 with a 6430 stop as this level is major support and is where we bounced after the Greek Debt deal was agreed. Given how much we have moved over the past two days I do not want to be short the FTSE at this time.
Dow Rolling Contract
My Dow plan also did not work out yesterday as shortly after I posted the Dow was trading at my 17470 buy level before eventually stopping me out of this trade for a small loss at 17420 again showing how important it is to have stops in the market and I am now flat. This morning the Dow is already trading 175 points lower from last night’s close and given the extent of this move I would expect some of this down gap to be filled when the US Markets open. As I mentioned in my S&P commentary above I am extremely worried for this market as having spent the best part of the last three months in America there is no doubt the US Economy is slowing. Today I will be a very small buyer on any further move lower to 17140/17190 with a 17080 stop as I will then look for some of this large gap lower to be filled when the US markets open.
September BUND
Unfortunately the BUND just missed my 153.95 buy level by a few points after I posted yesterday and is now trading 150 points higher which is very frustrating. Today I will be a small seller on any further rally to 155.90/156.30 with a 156.70 stop.
Gold Rolling Contract
I am still flat Gold and today I will move my buy level slightly higher to 1096/1105 with a 1089 stop.
Silver Rolling Contract
No change as I am still long from yesterday morning at 15.17 with the same 14.80 stop.
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