Last Friday’s trading session saw a surge in risk aversion with sharp losses in equity indices, the US Dollar underperformed against other majors while safe haven demand pushed core global bond yields lower. The fall in Oil prices to a new seven year low was already weighing on investor’s sentiment; however news of the closure of a well-known high yield US mutual fund exacerbated the negative mood, increasing the selloff in risk assets. Third Avenue announced the liquidation of its $789m Focused Credit Fund saying that poor bond market trading conditions made it almost impossible to raise sufficient cash to meet redemptions without having to fire sale assets. The liquidation of the fund underscores the current plight in the US high yield market and the risk it poses to other markets. Ahead of the FOMC later this week, the question now is whether this is just one bad apple or the prelude to a crash in the junk market.
For anybody following my New Platinum Service it lost 40 points on Friday but is still ahead by 735 points for December. The previous six months saw gains of 1510, 1600, 2833, 2195, 1810 and 3045 points respectively. If anyone is interested in my Platinum Service please email on bryan@tradernoble.com for details.
The S&P500 dropped 1.94% to 2012.37, the Dow fell by 1.76% and the NASDAQ lost 2.21%. In Europe the Eurostoxx index fell by 2.04% while the DAX dropped 2.44%. The VIX (CBOE volatility index) jumped 26.1% to 2439 closing at its highest level since the end of September.
In G10 currencies, against a background of risk aversion the usual major currencies with current account surpluses outperformed the USD. CHF was the outperformer up 0.5% followed by USD/JPY +0.45% while the EUR/USD gained 0.4% to 1.0986. Commodity Currencies were the underperformers, AUD fair worst falling by 1.3% to 0.7189, the CAD was -0.95% followed by the NZD down by 0.55%.
Safe haven demand pushed core global bond yields lower. 10y UK gilts closed 5.3bps lower at 1.81% while 10y German Bunds fell by -2.8bps to 0.54%.The US Treasury curve bull flattened with 2y UST loosing 5bps, closing at 0.877%. 5y and 10y UST lost just over 9bps ending at 1.554% and 2.218% respectively while the 30y bond dropped 10.4bps closing the week at 2.871%.
In Commodities, WTI oil traded to an intraday low of $35.18, however in the later part of the session it recovered some ground to close at $35.36, 3.34% down for the day. US Dollar weakness helped the performance in hard commodities; the LMEX index closed 1.46% higher with copper the notable performer up 2.46%. Iron ore prices fell for the 9th time in 10 days, losing 0.57% and ending the week at $38.3.
Last week’s data for the w/e Dec 8 shows overall speculative long Dollar positioning vs. G10 currencies were trimmed by 9.4% to 354.6k from 391.6k, so still quite long, but off record highs seen two weeks ago. Like last week, this was mostly on a paring of the AUD net short (-336k from -46.6k) and EUR (-172.3k from -182.8k). In Interest Rates, net speculative shorts in 2ys blew out to -114.6k from -70.6k, 5y went from -265.6 to –293.4k while in 10y, the small net long position in the previous week of +15.5k flipped to a net short of -24.5k.
As for data releases, US Retail sales in November rose by 0.2% vs 0.3% expected, however the control group (ex: gas, autos and building materials) grew by a solid 0.6%. Final demand PPI was +0.3% mom in November, above the 0.0% consensus while the University of Michigan Consumer Sentiment Index rose to 91.8 (Dec) vs 92 exp.
China data releases over the weekend exceeded expectations. Industrial production grew at 6.2% yoy in November, up from 5.6% in October (vs 5.6% exp). Fixed asset investments rose 10.2% ytd/yoy (10.2% prev,10.1% exp) and Retail Sales grew at 11.2%yoy (Nov) above 11.1% exp. Overall, the numbers suggest the Chinese economy is showing signs of stabilisation.
In other news the PBoC announced the introduction of a new trade weighted currency index signalling its intentions to broaden the active management of the RMB. The introduction of a trade weighted index provides the Chinese authorities with more flexibility to manage its Exchange Rate, particularly against those countries where export competitiveness has eroded. This new currency management approach will also allow the CNY/USD to depreciate when the US Dollar appreciated without the connotation of a PBoC led devaluation
This morning on the economic front we have Euro-Zone Industrial Production at 10.00 am. This is followed at 11.00 am by UK CBI Reported Sales at 11.00 am. Finally at 1.00 pm we have German Wholesale Price Index. We have no data of note due from the US today ahead of Wednesday’s key FOMC Meeting and Rate announcement.
December S&P 500
The S&P plan initially did not work out of Friday as shortly after I Posted the S&P sold off aggressively on the Third Avenue news which saw me go long at an average rate of 2038 before very quickly stopping me out of my long position at 2031 again showing how important it is to have stops in the market. Subsequently the S&P traded to a 2019.50 initial low which saw my 5 Handle Rule come into play where I went long at 2025. The bounce could not gather much momentum and I covered this position at 2031 as outlined earlier to my Platinum Members and I am now flat. I must confess I did not see such an aggressive move lower in the S&P on Friday but then again I did not know about the trouble that Fifth Avenue were in. Normally as I mentioned both Thursday and Friday whatever low is put in on the Friday tends to be the low print ahead of next Friday’ Quarterly Expiration but given such an aggressive sell-off last Friday we are going to have a lot of margin calls from the Clearing Houses going out later this morning.
The three criteria that I look for in terms of at least a short-term low are now in place as of last Friday’s close namely
1 The S&P is trading outside the bottom of its Daily Bollinger Band.
2 The Williams Index is trading at -95 or higher which it is with a -99 close
3 Most importantly the McClellan Oscillator must have closed with at least a reading of -250 which it did with a -257 close.
The last time we saw this set-up was on August 24th when the S&P was trading at 1870. However the MO closed with a -335 print on August 23rd. So we may have to wait one more day for this set-up to work. However with the FOMC Meeting on Wednesday I certainly do not want to be short and if this rout continues today then the FOMC may back off from hiking Interest Rates. The huge down move on Friday has left a large ‘Open Gap’ from Thursday’s Chicago close at 2057 to Friday’s day session high at 2034 and I would expect some if not all of the ‘Open Gap’ to be fill ahead of the FOMC on Wednesday or the December Expiration on Friday. Today I will be a buyer on any dip lower to 2000/2010 with a 1993 stop. Again if I am taken long and subsequently stopped out of this position I will use my 5 Handle Rule to go long again with a stoop below whatever low is printed. Given how oversold the S&P is trading I do not want to be short the market at this time.
EUR/USD
No change as I am still a buyer on any dip lower to 1.0870/1.0910 with the same 1.0840 stop. I do not want to chase the Euro higher hence my unchanged buy level. I still do not want to be short the Euro at this time.
March Dollar Index
No change as I am still a small seller on any rally higher to 98.50/98.80 with a 99.10 stop.
December DAX
The DAX got hit hard after I posted on Friday. As I went long the S&P, Dow and FTSE and had enough risk on board I did not buy the DAX and I am still flat. Incredibly the DAX has now fallen over 10% since the ECB Rate decision 10 days ago. The break of the previous support at 10600/10650 has led to an acceleration lower in the market with the DAX now sitting over 300 points lower following this break. However unlike the other major Indices the DAX is still ahead for 2015. Today I will look to go short on any rally higher to 10540/10600 with a 10670 stop. Given how oversold the DAX is trading I will look to buy the market on any further dip lower to 10180/10240 with a 10140 stop.
December FTSE
Shortly after I posted on Friday the FTSE traded lower to my 6040 buy level before very quickly stopping me out of this position for a small loss at 6015 and I am now flat. Friday was another great example of how important it is to have stops in the market. This morning the FTSE is very oversold, trading outside the bottom of its Daily Bollinger Band and at the bottom of its Williams Index. The FTSE is now only 150 pints away from its August 24th low. Given how oversold the FTSE is trading I have bought the market this morning at 5940 with a wider 5890 stop.
Dow Rolling Contract
The Dow started to fall hard after I posted on Friday with the market hitting my 17450 buy level before stopping me out of this position for a small loss at 17395 and I am now flat. Thankfully I had tight stops on all my long positions on Friday and I must confess I did not see the extent of Friday’s sell-off but then we did not know about the troubles that Fifth Avenue Hedge Fund was in. So far Friday’s low print for both the S&P and the Dow are holding. Given how oversold the Dow is trading I will again look to buy the market on any dip lower to 17220/17290 with a 17170 stop. I still do not want to be short the Dow ahead of the FOMC on Wednesday and the Expiration on Friday.
March BUND
The BUND plan finally worked out this morning as shortly after I posted on Friday the BUND traded higher to my 159.30 sell level before hitting my 158.90 T/P level this morning and I am now flat. Today I will again look to go short on any rally higher to 159.20/159.50 with a 159.80 stop.
Gold Rolling Contract
I am still flat Gold which is proving to be a difficult market to read over the past few weeks especially with the low volatility. Today I will raise my buy level to 1053/1063 with a 1046 stop.
Silver Rolling Contract
Shortly after I posted on Friday Silver got hit which saw me get stopped out of my long 14.40 position at 13.90/ As you know at this stage I feel naked without a long position on board and I bought Silver again at 13.85. I am still long with a 13.45 stop.
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