Market jitters continued, with another sea of red for equity markets and Yen being the favoured currency.
Market sentiment turned down following China unexpectedly weaker currency fixing early yesterday morning . The PBOC set the Yuan reference rate at 6.5314, an effective 0.22% devaluation, following the 0.21% devaluation the previous day. This was the weakest back-to-back adjustment since the shock mid-August 2015 devaluation. The Yuan offshore-onshore gap widened to a record level (over 1600bps intra-day), suggesting that the market expects ongoing devaluations in the CNY reference rate going forward.
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The market saw the PBoC’s move as an increasing tolerance of China’s Government to use depreciation of its currency as a policy tool to support economic growth. The move triggered a downward movement in Asian currencies, with the NZD and AUD swept away for the ride.
Sentiment for Asia remained glum following China’s Caixin Services PMI reading, which came in at 50.2, the second lowest reading since the survey began a decade ago. While analysts generally accept China’s Manufacturing downturn, the services sector is meant to be the offsetting growth engine. These figures raise doubt about China’s growth outlook and rebalancing of its economy towards services.
And just as if things seemingly could not get worse in the Asian session, North Korea decided to detonate what experts believe was probably a hydrogen bomb, under test conditions.
S&P500 futures were well down by the time the US Markets opened and this fall was largely maintained throughout the US trading session with the S&P closing down another 1.5%. European equities were down in the order of 1%.
Crude oil prices fell by more than 5% on large volumes to an 11-year low. Supplies at the US’s largest hub, Cushing Oklahoma, rose to an all-time high while other data showed a rise in crude output by 17,000 barrels a day to 9.22m, the highest since August. These data impacted energy stocks, weighing on equity market sentiment.
In economic news, ADP employment rose by a healthy 257k in December, setting the scene for a good Non-Farm payrolls outcome tomorrow. The US ISM non-manufacturing index was weaker than expected at 55.3, but the detail was more supportive. The index was driven down by suppliers deliveries, while the orders, business activity and employment components were all higher. The Markit Services PMIs were slightly better than expected for the Euro area but slightly weaker for the UK.
The minutes of the FOMC’s December meeting were seen to be slightly dovish, with some on the committee seeing the December hike as a close call. Some members also believed that the risks attending their inflation forecasts remained considerable. There was no hint of the next move in rates.
On currency movements, it was another good day for the safe-haven Yen, which traded as low as 117.65 overnight and currently sits at 118.05. That said, the point-to-point movements between the Yen, Swiss Franc, Euro and Sterling against the USD over the last 24 hours have all been within 0.4% of the USD, not a big movement in the scheme of things. EUR was up slightly to 1.0786, perhaps a reflection of that PMI services data, while GBP fell modestly to a 9-month low against the USD and trades around 1.4610.
Most of the action in currency markets was in the Asia-Pacific currencies. NZD/USD dropped immediately following the PBoC Yuan fix announcement to around 0.6630 and has oscillated around that level since. AUD/USD showed more of a downward trend and traded as low as 0.7049 before ticking up after the FOMC minutes were released to 0.7069.
Investors switching out of equities into the safety of the bond market has seen US Treasuries well bid, with the 10-year rate down 5bps to 2.18%, trading close to the lows for the session. The 2-year rate has dipped below the 1% mark and currently trades at 0.99%. The Fed’s Fischer was on the wires claiming that 4 hikes in 2016 was in the ballpark, and noting that this was above the market expectations of only 2 hikes. However, he also acknowledged that China’s slowing economy and other sources of uncertainty made it difficult to predict the path of policy.
Overnight the Asian stock markets got hit hard after the circuit breakers kicked in on the Shanghai market which only traded for a net 14 minutes for the whole session as the authorities halted trading again when the 7.2% limit down was hit. This has filtered through to the other markets and on the Europe this morning. This week’s now mini crash is the worst start for a new year since records began. Not helping the market was the further devaluation of the Chines Yuan which is now trading at a new high at 6.73.
This morning on the economic front we already had the release of German Factory Orders which came in very strong at +1.5% versus 0.1% expected. However we also had the release of German Retail Sales which came in very weak with a -0.2% print versus +0.5% expected. At 10.00 am we have Euro-Zone Business Survey, Retail Sales and Unemployment. This is followed by US Challenger Job Cuts and the Weekly Jobless Claims at 12.30 pm and 1.30 pm respectively. Finally after the US markets close this evening the Chicago Fed President Charles Evans is due to speak.
March S&P 500
The crash of 2016 continues with the S&P down over 120 Handles since last week making this the weakest start for the US Market in over 80 years. The S&P is trading below its Bollinger Band and Williams Index but unfortunately the internals are not weak enough to want me to aggressively buy this market with the McClellan Oscillator only closing with a negative 77 reading. If you compare this reading to trading on December 14 last when the last time the S&P was trading outside its Bollinger Band and Williams Index the MO had an oversold -295 reading. Against that have the January Nominal Options Expiration next Friday and traditionally whatever low is put in on the Thursday/Friday in the week preceding expiration tends to be the low. This morning’s huge move lower in the Futures Market has left another 35 Handle Gap so far. Already this week we have two large Gap’s from last Monday from 2012/2035.5 which was the close on New Year’s Eve and yesterday’s afternoon high at 1994 versus Tuesday’s close at 2010. I cannot remember the last time we had three such large Gaps in four trading sessions. For this reason I have bought the S&P at 1952 with a stop below the overnight low at 1945. If I am stopped out of this position I will again look to buy the market on any further dip lower to 1928/1934 with a 1922 stop. If I am unable to T/P on any of these trades I will use my 5 Handle Rule to go long again with a stop below whatever new low is printed.
Yesterday’s S&P plan worked well as shortly after the S&P traded lower to my 1978 buy level the S&P made a new low at 1971.25 before having a nice 23 Handle rally to 1994 which enabled me to cover this position at my revised T/P level at 1983. If this carnage continues it will only be a matter of time before we see the Fed implement QE 4. Tomorrow’s Non Farm Payrolls are now vital for Fed Policy going forward especially as it will be the last Employment data ahead of the next Fed Meeting on January 27.
EUR/USD
My long 1.0725 Euro position finally worked out as shortly after I posted yesterday the Euro traded higher to my 1.0755 T/P level and I am now flat. The Euro traded as high as 1.0830 overnight before selling off again to 1.0775 where it is currently trading. Today I will again look to buy the Euro on any further dip lower to 1.0690/1.0730 with a 1.0665 stop.
March Dollar Index
I am still flat the Dollar and today I will lower my sell level to 99.85/100.15 with a 100.40 stop. Remember a break and close over 101 will be very bullish and opens up the possibility of a move higher to at least 1.07 over the coming months.
March DAX
The DAX plan worked well yesterday as after the DAX traded lower to my 10130 buy level the market subsequently rallied over 100 points which enabled me to cover this position at my 10170 T/P level and I am now flat. The DAX is opening very weak this morning with the market incredibly trading below 9900 for a 1000 point fall in the last eight days. This morning just like the other main stock indices the DAX is extremely oversold trading outside the bottom of its Bollinger Band and Williams Index. The market has good support at 9800 ahead of the major support at 9350 which was the August 24 mini crash low. Today I will be a buyer on any further dip to 9770/9830 with a 9725 stop. Given how oversold these markets are trading I do not want to be short at this time.
March FTSE
The FTSE is not as oversold as the DAX or US Stock Indices but is trading at the bottom of its Bollinger Band. In points terms if one wants to have a low exposure to the stock market at this time then the FTSE is the safer bet. I have just bought the FTSE here at 5865 with a 5825 stop.
Yesterday the FTSE plan worked well as shortly after lunch the FTSE traded lower to my 5970 buy level before having a nice 50 point rally which enabled me to T/P on this position at 5992.
Dow Rolling Contract
The Dow is now 400 points lower since the New York close last evening making this a 1200 point total loss since December 29. The margin calls must be incredible and the Fed’s Plunge Protection team will have some job to try and halt this decline when they wake up later this morning. As I mentioned last month I taught the markets would run into a brick wall in January but I never expected the brick wall to be so strong. Every Dow stock got hit yesterday with the exception of Wall Mart which interestingly has traded higher each day this week. Yesterday after the Dow traded lower to my 16920 buy level I did not like the price action and covered this trade at 16940. Subsequently after I cut the Dow traded as high as 17010 before again running into its own brick wall. Today I will again look to buy the market on any further dip lower to 16470/16530 with a 16420 stop as I just cannot see the market leave this huge gap lower without some attempt to at least partially fill this gap.
March BUND
This morning the BUND has traded higher to my 160.15 sell level. I am still short and I will leave my stop the same at 160.55.
Gold Rolling Contract
Gold has finally broken its key resistance at 1080/1090 but unfortunately is trading at the top of its Bollinger BUND making if difficult for me to chase this market higher. I am still flat and today I will leave my buy level unchanged at 1064/1072 with a 1058 stop.
Silver Rolling Contract
I am still long Silver at 13.92 with the same 13.40 stop. I must say I am disappointed with the price action in Silver and today I will lower my T/P level on this position to 14.10.
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