It’s getting interesting. And it is likely to remain that way for a little while yet. China’s move to a more market orientated currency is causing volatility and uncertainty and it might take a while until there is clarity. There are two sides to the story and until markets decide which path is the one we are taking then the direction of assets will (and has) bounce around. Yesterday, China set the USD/CNY fix at 6.3306, around 1.6% higher than the previous day. That was higher than some expected, although some depreciation was expected. Recall that this currency is usually very stable. The Chinese currency continued to sell off sharply through the day, taking Asian currencies with it.
For anybody following my New Platinum Service it made 107 points yesterday and is now ahead by 582 points for August. The previous two months saw gains of 1810 and 3045 points respectively.
That weighted on the AUD and regional risk assets. Markets are concerned because it implies weakness in the Chinese economy, and depreciation of a normally stable currency could lead to corporate losses, foreign investor losses on local asset holdings and general volatility in asset prices leads to uncertainty. This drove the decline in equity markets through the London session and lower Bond Yields, as markets worry about the Fed delaying its rate hike. For now, as the Fed’s Dudley put it, the concerns are over the volatility in Emerging Markets and the weakness in economic growth that this movement is implying.
The other side to the story is that this depreciation is a loosening of monetary conditions for China and that it should boost demand, over time. That might take time to flow through and rapid depreciations can provide negative for an economy. And that is likely behind the China currency intervention, reported in the FT and Bloomberg, to slow the depreciation of the CNY yesterday- after it had fallen around 2% in the day. The move to slow the depreciation, starting in London, still places today’s fix higher than yesterday, but slows the move. It isn’t specifically clear if the subsequent rally in US equities, and higher Bond Yields was a result of the calming of concerns about China’s depreciation but it does perhaps assist.
The US Dollar is now lower against the G10, with the commodity currencies of NOK, NZD and AUD outperforming. This highlights the fickle nature of this event and the ongoing uncertainty of just how this plays out. So keep watching. The EUR was also higher and hit 1.12 against the USD at one point. This was despite Germany noting that it was not comfortable with the Greek agreement and conditions and it plans to withhold funds. But, they are ok with a bridging loan so creditors are paid next week.
European Equity markets are opening firmer this morning after the PBoC set its fixing for the CNY at a higher 6.40 versus the US Dollar with the German DAX now ahead by 1.5%.
This morning on the economic front we already had German CPI which was released earlier at 7.00 am and this came in as expected at +0.2%. At 12.30 the ECB will release its Minutes from its latest ECB Meeting and this will certainly garnish the market’s attention. Then at 1.30 pm we have US Retails Sales and the Weekly Jobless Claims. Finally at 3.00 pm we have Business Inventories.
September S&P 500
The volatility so far in the S&P has been incredible this week with the market after yet another wobble overnight is now trading nearly 45 Handles higher than the intra-day low made at 2047 yesterday afternoon. It is likely that this volatility will continue until we get the Fed Meeting out of the way next month. Yesterday afternoon the Fed’s Dudley said he was pretty relaxed in relation to a Fed Rate hike and this is why today’s Retail Sales data will be closely watched by the markets. The acceleration lower after the 200 Day Moving Average at 2065 was broken was fast as was the subsequent turnaround. All I can say is that if and when this 2035/2040 major support level is broken it could well lead to a mini-crash. Yesterday my initial S&P plan worked very well as shortly after I posted the S&P traded lower to my 2057 buy level before having a nice rally before lunch which enabled me to cover this position at 2065 as outlined earlier to my Platinum Members. Unfortunately the S&P continued to rally into the close with the market hitting my 2082 level just on the close. I had my take profit level too aggressive at 2070 overnight and subsequently got stopped out of this position at 2087 and I am now flat. It is amazing that no matter what ‘Open Gap’ occurs in the S&P they always get filled and this morning the last remaining ‘open Gap’ of recent times is from last Monday at 2099. Today I will be a small seller from 2097/2102 with a 2106 stop. My only interest in buying the market today is on a dip to 2078/2083 with a 2075 stop which is just below the overnight low.
EUR/USD
The march higher in the Euro continued yesterday as once the minor resistance at 1.11 was broken we saw a quick spike to over 1.12 before overnight the Euro sold off on the higher CNY fixing. I am still flat the Euro and today I will be a small buyer on any further dip to 1.1080/1.1110 with a 1.1055 stop.
September Dollar Index
No change as I am still a small seller on any rally higher to 97.10/97.40 with a 97.70 stop.
September DAX
Trading this market is still like going into a casino and putting all your chips on either red or black and hoping your colour comes up, as I have never seen the DAX trade with so many opening gaps that has happened over the past three months. There is no doubt that holding a DAX position overnight is froth with danger. I am still flat the DAX and presently I am only trading this market in a quarter of my normal size. Today I will raise my sell level slightly to 11170/11220 with an 11270 stop. It is very difficult for me to buy the DAX when you consider the fact that the market is up 15% for the year while the US Markets are generally flat to lower. However the real trigger point for a breakdown in the DAX does not come in to the Greek crisis low last month at 10650. Despite the main support been so far away from current prices I do not want to be long the DAX at this time.
September FTSE
Very frustrating as the FTSE just missed my 6480 buy level twice by 7/10 points and is now trading 120 points higher. Today I will be a small seller on any further rally to 6645/6675 with a 6695 stop. I will also be a small buyer on any dip lower to 6530/6560 with a 6485 stop which is just below yesterday’s low print.
Dow Rolling Contract
The Dow plan worked very well yesterday as the market having traded lower to my 17150 buy level had a lovely 350 point turn around from yesterday’s low which enabled me to cover this position too early at 17260 and I am now flat. Today I will be a small seller on any further rally to 17530/17580 with a wider 17625 stop. Given the extent of yesterday’s rally I do not want to be long the Dow at this time.
September BUND
Once the Equity markets started to rally the Bond markets turned around and traded lower. The BUND having made an intra-day high at 155.48 shortly after I posted is now trading at 154.90. Today I will lower my sell level to 155.40/155.70 with a 156.05 stop.
Gold Rolling Contract
I am still flat Gold and I am seriously wondering whether the recent 1071 low prints is going to hold for at least the rest of the year. Remember Gold is down $840 since its 2011 high at 1911. For this reason I will raise my buy level slightly to 1100/1112 with a tight 1092 stop which is just below the recent low print at 1093.
Silver Rolling Contract
My long 15.17 Silver position taken on Tuesday morning worked out well yesterday as Silver had a nice rally which enabled me to cover this position at 15.55 as outlined earlier in a separate email to my Platinum Members and I am now flat. Today I will again look to buy Silver on any dip to 15.10/15.30 with the same 14.80 stop.
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