Despite the best efforts of policy makers of late to downplay the significance of the first Fed rate rise relative to what happens after that, global markets remain in the midst of rate rise ructions. The difference from the 2013 ‘taper tantrum’ is that that equity markets and emerging market currencies not US Treasuries are bearing the brunt, and that current market machinations are as much about China as they are Fed policy-centric. US stocks swooned for the second day running on Friday, the 3.1% fall in the Dow bringing the cumulative decline since the May 19 peak to just over 10%. The S&P500 lost 3.2% and the NASDAQ -3.5%. European stock indices were also +/- 3%.
For anybody following my New Platinum Service it made 70 points on Friday and is now ahead by 1072 points for August. The previous two months saw gains of 1810 points and 3045 points respectively.
As was the case Thursday, the underlying source for the correction was market developments/news outside America (read the weaker than expected China PMI and 4.3% drop in the Shanghai Composite). The 8.9 point jump in the VIX to 28.03 – the biggest one-day rise in four years – brings the rise on the week to 118% and to the highest level since the peak of the first (2011) Euro zone crisis. There are many in the market, who like us, have long felt that September was a more likely date than December for Fed ‘lift-off’ given the amount of credibility Fed chair Yellen has vested in acting this year and so as to avoid the risk of becoming a hostage to fortune by waiting until December.
The Fed has just become exactly that – a hostage to (domestic equity market) fortunes. Two weeks ago, San Francisco Fed President John Williams re-framed the Fed policy debate into a question ‘Why not?’ (move soon) rather than ‘Why?’, suggesting that bad things would have to happen between now and September to stop the Fed moving. The fact risk markets are swooning at a time when money markets are only attaching about a one in three chance of September lift-off likely means that equity markets will almost certainly need to come roaring back in the coming few weeks to get the Fed onto the starting line, alongside some undeniably robust US economic data. Friday’s one US data print, the Markit manufacturing PMI, underwhelmed at 52.9 down from 53.8 in July.
Friday’s FX price action again demonstrated the divergence been how FX markets have been travelling for months with respect to confidence in the Fed lifting rates no later than September, and interest rate markets. On almost any other occasion in recent years – and especially since the GFC, you would have safely bet on the US Dollar being higher not lower if confronted with this sort of equity price action and the strength of the safe haven bid under Treasuries. Outstanding positioning speaks volumes, with long EUR/USD and long USD/JPY positioning almost certainly more extreme than suggested by recent IMM data and which have the JPY and EUR net speculative shorts well back from early this year albeit still both of significant size.
This morning the markets are getting crushed with the Dow and S&P down 400 points and nearly 50 Handles respectively mainly on the back of China falling another 9% which is now the biggest fall since the 2007 crisis. The Euro traded up to 1.1500 overnight. We better see some intervention from the Central Banks soon or this sell-off has the potential to become really nasty.
Today is very light for economic data with the Chicago Fed National Activity Index due to be released at 1.30 pm. This is followed at 3.00 pm by German Import Prices. Finally just before the New York close this evening the Fed’s Lockhart will speak at 8.55 pm on the Public Pension Funding Forum but given events over the last few days it will be interesting what he has to say about Fed Policy now.
September S&P 500
When I wrote my commentary last Friday I must confess that I taught the market had no chance in hitting my 1987 buy level but that is exactly what happened. Thankfully after hitting my buy level the market rallied to 2000 which enabled me to cover this long position at 1994 as outlined in a separate email to my Platinum Members and I am now flat. While I have been writing for the last six months about the importance of the 2035/2040 support level I did not expect to see the S&P trading at 1920 this morning having hit a 1911 low overnight. These moves are the biggest that I have seen since 9/11 attacks in 2001. This morning with the S&P trading at 1920 we have now left a 50 Handle Gap from last Friday’s close which is incredible when you consider that post the Fed Minutes last Wednesday at 7.00 pm we were trading at 2093. Looking at the charts the S&P has long term support at this 1920 level which was a former Bull market uptrend and I would expect the market to have some sort of relief rally given how oversold we are in all equity markets and I would also expect the Fed to mount some sort of intervention soon or else all the monies that they spent on QE will soon evaporate along with the US and World Economies. This morning I am a small buyer here between 1915/1925 with a wider 1895 stop. Please remember I am only trading in small size. I cannot remember the last time that I have seen these equity markets so oversold and I would expect a decent violent rally to correct this sell-off before the markets get hit again.
EUR/USD
Having called for everyone not to be short of the Euro for the past few months as to me this US Dollar was totally miss-priced ever since we broke 1.14 it is frustrating that the Euro again just missed my 1.1220 buy level after I posted on Friday by 8 points before going on to rally 280 points to 1.15 and I am now flat. The Euro has strong resistance between 1.1450/1.1500 and initially I would expect the market to having difficulty in breaking this level especially given how overbought we are after the near 500 point rally since last week. Today I will look to go short in small size from 1.1490/1.1540 with a 1.1575 stop. Give how overbought we are trading today I do not want to be long the Euro at this time.
September Dollar Index
I am still flat the Dollar and with the market trading near my 93.50 major support level as outlined last week, today I will be a small buyer from 93.70/94.10 with a 93.30 stop.
September DAX
Ten days ago the DAX was trading at 11800 and this morning we are trading at 9700 as all the gains for 2015 are wiped out in a few trading sessions. Words cannot describe the carnage that is been implemented against all equity markets this morning as one support after another is taken out. Thankfully on Friday after the DAX hit my 10250 buy level after I posted the market had a nice rally after lunch to 10350 which enabled me to cover this position as again outlined to my Platinum Members and I am now flat. As I would expect some sort of intervention from the Central Banks later I will again look to buy the market in very small size from 9760/9830 with a 9695 stop. Given how oversold we are on every basis that I follow I do not want to be short the DAX at this time.
September FTSE
I was too greedy with my 6280 long position on Friday as I had a Take/Profit level at 6360 which unfortunately missed by 15 points and I was stopped out of this position for a small loss at 6240. This morning the FTSE is trying to bounce off its 15% sell-off since its high a few months ago and given how oversold we are trading I have bought this market again at 6010. I will leave a tight 6560 stop on this position as I look for the FTSE to bounce back to at least the 6100 level.
Dow Rolling Contract
The Dow has fallen over 2300 points since its mid-May high as one support after another just gets taken out. The Wilshire 5000, which represents almost the entire stock market, has lost $1.77 trillion since the June 22nd top at $22.537 trillion. This loss will be well exceeded this afternoon when the US markets open with the Dow nearly 400 points lower in the Futures market already. It is incredible that one-third of the $5.0 trillion total of all the QE programs from the Fed has already been wiped out. There is no chance of the Fed raising rates in September given this move lower and do not be surprised if the Fed do QE 4 in the coming weeks. Today given this incredible move lower in just a few days I will be a small buyer of the Dow from 15980/16050 with a 15895 stop. I just cannot see this morning’s near 400 point gap lower not try to get some way filled when the US markets open later. My Dow plan did not work out on Friday as shortly after the markets traded lower to my 16815 buy level the market just missed my 16890 T/P level with a 16882 high before stopping me out of this trade at 16720 and I am now flat. Friday was another great example of how important it is to have stops in the market.
September BUND
Whereas I was unlucky with my Euro fill above the BUND worked very well on Friday as the market traded higher to my 155.95 sell level before having a nice sell-off which enabled me to cover this position at 155.65 as outlined earlier to my Platinum Members and I am now flat. I am surprised that the BUND is not trading higher this morning and for this reason I will again look to go short on any rally higher to 156.05/156.40 with a 156.70 stop.
Gold Rolling Contract
I am not going to chase this market higher as I am already long Silver. For this reason I will leave my buy level unchanged at 1122/1132 with a 1114 stop.
Silver Rolling Contract
The move lower in the equity markets has surprisingly led Silver to trade lower to my 15.15 buy level. I am still long and I will leave my stop the same at 14.60.
Recent Comments