It has been a very eventful past 24 hours, with US equities ending in a (deep) sea of red with the main indices all off over 2%, Bond Yields lower and the US Dollar weaker across the board led by a rally of more than 1% in the Euro. The VIX is up nearly four points to just shy of 19.0 – the highest since early July. Another drop in the Shanghai Composite index set the tone for the session, with a 3.4% fall taking the index back down to its 200-day moving average and theme has continued overnight with another 2% fall on the back of the extremely weak Flash Chinese PMI.
For anybody following my new Platinum Service it made a hard earned 30 points yesterday and is now ahead by 1002 points for August. The previous two months saw gains of 1810 points and 3045 points respectively.
As I mentioned at the end of yesterday’s commentary, Kazakhstan abandoned its fixed exchange rate regime, prompting near- 25% depreciation against the USD. Pressure is mounting on other fixed exchange rate regimes, with particular attention on Saudi Arabia. In Turkey, a deteriorating security situation ahead a general election later this year (the second for 2015) has seen the lira weaken to its worst ever level against the USD. North and South Korea exchanged artillery fire across the DMZ, in what is being called the most serious exchange since 2010.
On the Saudi Riyal, incidentally, 12-month forward points are priced for about a 1% devaluation (implying non-trivial risk of a much bigger devaluation) The last time markets seriously speculated on a Riyal devaluation was back in 2002 (and following a period during which Oil prices slumped from above $50 to below $25). In 2007 (after oil had surged through $100 for the first time) markets flirted with Riyal revaluation. One factor that is not in my view a relevant contributor to overnight ‘risk-off’ moves is Greece PM Alex Tsipras’ decision to call snap election: this is actually likely to produce a stronger ruling coalition than currently exists, and was well flagged during the bailout negotiations when Tsipras sought the support of Opposition parties to gain parliamentary approval for the terms and conditions necessary to secure the bailout.
Testament to this, EUR/USD is the best performing currency pair of the last 24 hours. The EUR move in particular – and broad based USD slippage in general – on a day when incoming US data mostly surprised to the upside (Existing Home sales +2.0% vs. – 1.1%, Philly Fed 8.3 up from 5.7 and 6.5 expected) speaks volumes about the role of positioning in what is still the thick of the summer holiday season. That US front-end yields aren’t lower still (2yr down only 0.4bp given the quite intense risk-off sentiment and inevitable increased doubts about Fed September ‘lift-off’ also owed much to positioning (there was a big extension of speculative long in 2-year note future last week). Nevertheless, the Fed Funds futures market has further reduced odds on a September Fed move, to 35% from 45% this time last week.
Overnight the dramatic sell-off that has ensued since the FOMC Minutes were released on Wednesday Evening has continued following the release of the Chinese Flash PMI which printed at 47 which was well below expectations and is now at a 77 month low. The Dow which was trading north of 17500 on Wednesday is now trading at 16850 this morning. Meanwhile the DAX is now 2400 from points lower than its April high. These are serious moves with the Euro now approaching 1.13 as the main benefactor with this risk-off sentiment been Gold which is now over 6% higher on the week.
This morning on the economic front we have German and Euro-Zone Manufacturing/Services PMI which will be released at 8.30 am and 9.00 am respectively. At 9.30 am we have the UK Public Finances. In the US the only data of note due to be released today is Manufacturing PMI at 2.45 pm. Finally we have EC Consumer Confidence at 3.00 pm.
September S&P 500
The S&P plan worked well yesterday as shortly after I posted the S&P traded lower to my 2054 buy level before having a nice rally after lunch which enabled me to cover this position at 2062 as outlined earlier to my Platinum Members and thankfully I am now flat. I must confess when I wrote my commentary I taught I was been overly optimistic in trying to buy the S&P at 2054 when you consider post-FOMC on Wednesday at 7.00 pm we were trading at 2093 but to consider we got down to a low of 2009 overnight just shows the dramatic move we have had once the 200 Day Moving Average and more importantly the 2035/2040 major support that I have alluded to over the past few months were both broken. Thankfully we had no buy level after we were able to take profit after yesterday’s dramatic move. The scary thing about the last two days is the huge sell-off in the last 10 minutes of trading before the New York close. To me the break of the 2035/2040 level is very significant and it is going to take a lot of buying to drive this market higher form here. This morning the S&P is trading way outside its Bollinger Band but unfortunately the McClellan Oscillator only closed with a negative reading of just -142 which implies there is more room on the downside. Today given the fact that we have broken this key 2035/2040 level I will be a small seller on any rally higher to 2038/2048 with a 2056 stop. My only interest in buying the market today is on a further wash-out to 1975/1988 where I would be reasonably aggressive with a 1965 stop. If I am taken long and subsequently stopped out of this trade I will be a more aggressive buyer in front of 1953 with a 1940 stop.
EUR/USD
The move higher in the Euro over the course of this week has been dramatic when you consider how quiet the market has been over the past few weeks. Again I was very unlucky with my Euro call yesterday as the market just missed my 1.1100 buy level by five points shortly after I posted and is now trading at 1.1280 as I write this commentary. At least we have not been short the Euro for the past few weeks and the overnight break at 1.1250 could be significant. As I mentioned yesterday the next resistance is crucial at 1.1450 as a break and close over this level could lead to an acceleration higher to the 38.2% retracement of the whole down move at 1.18. Today I will move my buy level higher to 1.1180/1.1220 with a 1.1145 stop.
September Dollar Index
Just like the Euro above the Dollar only missed my 96.70 sell level by a few points after I posted yesterday morning and is now trading at 95.50. I think the Dollar will head lower over the coming week to its next major support at 93.50 and then we will see what the market wants to do. Today I will lower my sell level to 95.95/96.35 with a 96.70 stop which is just above yesterday’s 96.63 high print.
September DAX
The price moves in the DAX just continue to amaze me as presently each trading session seems to add more volatility. However the DAX plan worked well yesterday as just as I posted the market was getting hit to the downside which enabled me to buy the DAX at 10550 before the market had a nice rally over lunch to 10650 which enabled me to take profit at 10630 as outlined earlier to my Platinum Members and I am now flat. To think from the 10650 high at 2.00 pm yesterday that we are now trading another 400 points lower is just incredible. Given how oversold the DAX is and the fact that we are down 13% since its 11800 high on July 20 I have bought the market here this morning in again very small size at 10250. I will leave a 10180 stop on this position as I look for the DAX to try some of its ‘Open Gap’ from yesterday’s close at 10400. When I mention yesterday about the DAX having key support at 10650 I did not expect that we would get such a dramatic move so quickly. Given the fact that we have broken this level so easily I will also look to go short on any move higher to 10550/10620 with a 10680 stop.
September FTSE
The FTSE plan did not work out as very late in the trading session the FTSE traded lower to my 6340 buy level before stopping me out of this trade for a small loss at 6295. Given how oversold the FTSE is currently trading and the fact it is at an 18 month low, bottom of both its Bollinger Band and Williams Index I have gone long again at 6280. I will leave a 6240 stop on this position.
Dow Rolling Contract
Thankfully by the time that I posted yesterday the Dow was in free-fall with the market trading at the bottom of my buy level at 17160. Unfortunately the Dow could not get anything going on the upside before stopping me out of this position for a small loss at 17095 and I am now flat. Yesterday was another great example of how important it is to have stops in the market. The Dow has been the weakest performing Index of the major US stock markets and if the Dollar continues to weaken we may see the Dow start to out- perform again. Given how oversold the Dow is on the charts and the fact that we are down a hefty 1500 points since its Mid-May high I will look to buy this market on any dip lower to 16790/16850 with a wider 16720 stop. Remember we still have the Options Contracts to expire this evening and I still would not rule out a move higher later today.
September BUND
No surprise that with the equity markets getting killed that I was stopped out of my small 155.35 short position at 155.75 and I am now flat. I still believe that the upside for the BUND from here is limited as a lot of Hedge and Pension Funds are still trapped long from the dramatic move lower in the BUND earlier in the Summer. For this reason I will again look to go short on any move higher to 155.95/156.35 with a 156.65 stop.
Gold Rolling Contract
No change as I am still flat Gold and my only interest in buying this market is still on a dip to 1120/1130 with an 1112 stop.
Silver Rolling Contract
No change as I am still flat Silver which is struggling to follow Gold higher. For this reason I will leave my buy level the same at 15.00/15.30 with the same 14.60 stop.
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