Yesterday the MSCI Emerging Market Equity Index (MXEF) entered bear market territory, down over 20% from its early January highs. The latest moves have been led by a 6.5% drop in the share price of Tencent after the Chinese e-commerce behemoth reported its first profits drop in over a decade (a freeze on new game approvals in China reportedly one of the reasons). While we have seen a bit of contagion to Developed Markets (the S&P 500 only closed down -0.8%) latest EM ructions serve to further highlight the contrasting fortunes of EM and DM markets this year and which in currency land is one key reason for the weakness in the Australian Dollar. Meanwhile Commodity prices are in a sea of red, including a 4% drop for Dr. Copper and which brings its fall since early June to 22%. In the circumstances, it is a wonder that AUD/USD is still trading on a 0.72 handle (0.7240. A generally risk-off tone sees US Treasury yields lower (10s by 4 bps to 2.86%) despite another set of generally good US economic data which to date shows no ill-effects from US tariffs or China’s retaliatory counter-measures.
To mark my 1650th issue of TraderNoble Daily Commentary I am offering a special 2 year rate of Euro 2750 for my Platinum Service which includes 1 to 4 updated emails throughout the trading day To demonstrate this value, a monthly subscription over the same period would cost 4440 euro in total This offer represents a 38% discount and is open to both new and existing members. If anyone is interested in this offer can you please email me on bryan@tradernoblecom for details
For anyone following my Platinum Service it lost 330 points yesterday and is now ahead by 165 points for August, having made 1074 points in July, 994 points in June, 1927 points in May, 1657 points in April, 1760 points in March, 2256 points in February, and 879 points in January. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points
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Currencies
So while the aforementioned MXEF is off 22% this year, the JPM Emerging Market Currency Index (FXJPEMCS) is off a slightly more sedate 14%. The reason it is marginally higher is because of an 8% rally in the hitherto beleaguered Turkish Lire (8.33% of the index). This is after the Turkish central banks further cranked up restrictions on Turkish banks’ ability to lend out TRY, limiting swap and other derivative transactions to 25% of total equity capital (down from 50% imposed at the start of the week). Alongside, Turkey’s ally Qatar has promised $15bn in inward investment.
Against this, there is no sign of any thaw in US-Turkey relations. Yesterday Turkey imposed retaliatory tariffs against the US on a variety of products. The US has said it would consider lifting sanctions on Turkey if the American pastor Andrew Brunson were released, but not including on steel imports.
In contrast to the forced short covering rally in TRY, the Chinese Yuan is weakening once more. The onshore CNY went out at 6.935 yesterday (from 6.88 at the open) and the offshore CNH is currently at 6.95. Today’s fix will be particularly keenly watched. And yesterday evening, Indonesia somewhat unexpectedly raised rates by another 25bps, the third rise in as many months and fourth since April. Only 7 of 28 analysts were formally forecasting the move, which comes amid fresh pressure on the IDR and which, unlike some of the idiosyncratic reasons for pressure on other EM currencies this year, looks to be a classic example of higher US rates and strengthening USD pressuring capital flows and the currency amid a rising current account deficit (currently -2.4% of GDP). There will be more elsewhere where that came from if the Fed proceeds to lift rates twice more in H2 as currently expected and the USD keeps rising.
Elsewhere in Emerging Markets, the ZAR, COP, MXN and RUB are all off between 1.4 and 2.2% (ZAR faring worse and after the government yesterday refined its land-expropriation demands to say that white farmers should hand back any land over 12,000 hectares without compensation).
In the G10 FX word, the DXY Dollar Index has pulled back in afternoon NY trade to be slightly down (-0.06%) with very mixed performances among individual currencies. SEK is again faring worse (still behaving more like an EM than G10 currency), off 0.68%, while the JPY fares best, up 0.38%. GBP, NOK and CAD have all fared worse than AUD and NZD, both of which are off less than 0.1%. WTI crude off over $2 or more than 3% has hurt CAD and NOK, while ‘’as expected’’ UK CPI data has done nothing to alter the drag on all things GBP from ongoing Brexit uncertainty/fear of a ‘’no deal’’/hard Brexit.
Given the ongoing pressures on EM currencies, I confess to being a bit surprised AUD is not currently lower, having had a look at the 0.7200 level yesterday afternoon. Barring an unexpectedly strong upside surprise in today’s labour market data I suspect it is only a (short) matter of time before AUD/USD trades on a 0.71 handle.
Commodities
With the exception of metallurgical coal (+0.3%) every commodity price that I track across oil, precious and base metals and agriculture, are smartly lower. Zinc (-6.3%) and lead (-7.1%) are standouts but it is the 4% fall in copper that captures a lot of the headlines given its ‘’bellwether’’ status with regards to the overall strength of global demand. Precious metals are further succumbing to the allure of a rising dollar and the prospect of still-higher US rates and it may not be a dissimilar story for oil where Brent crude is off 2.4% on the day and WTI -3.2%.
Bonds
US Treasury yields were under mild downward pressure during the Tokyo day yesterday but yield declines accelerated in Europe, UST10s falling from 2.88% to a low of 2.84% (back to 2.86% into the NY close). Shorter-dated US yields are too far behind with the 2-year note off 3bp in the past 24 hours, while in Europe Euro-Zone peripheral bonds spreads are widening out again (Italy +13.3bps versus a 2.3bp fall for Bunds, Spain and Portugal both +3bps at 10-years).
Economics
UK: CPI (y/y%), Jul: 2.5% vs. 2.5% exp.
UK: Core CPI (y/y%), Jul: 1.9% vs. 1.9% exp.
US: Retail Sales (m/m%), Jul: 0.5% vs. 0.1% exp. but June revised to 0.2% from 0.5%
US: Retail Sales Control group (m/m%), Jul: 0.5% vs. 0.4% exp., June revised to -0.1% from 0.1%
US: Empire Manufacturing Survey, Aug: 26.6 v 20 exp.
US: Industrial Production (m/m%), Jul: 0.1% vs. 0.3% exp.
US: Manufacturing Production (m/m%), Jul: 0.3% vs. 0.3% exp.
This morning on the Economic Front we have UK Retail Sales at 9.30 am and this is followed by Euro-Zone Trade data at 10.00 am. Finally at 1.30 pm we have the US Weekly Jobless Claims, Philly Fed Business Outlook and Housing Starts/Building Permits.
September S&P 500
Initially my S&P plan did not work well as after the market traded lower to my average buy level at 2821 I was quickly stopped out of this position at 2811. Subsequently the S&P traded to a new low at 2803 and this move saw the market hit my second buy level at 2805 before having a nice rally into its 2821 close. This move higher enabled me to cover my long position at my 2814 T/P level and I am now flat. There is no doubt that the lack of liquidity is contributing to the recent volatility but as mentioned yesterday the S&P is still a buy on dips as long as we hold the key 2800/2810 support level which in turn is just above its 50 Day Moving Average which comes in at 2791.
According to data firm FactSet, 91% of the S&P Index has reported earnings. Of the companies that have reported, 79% have had a positive EPS surprise while 72% have had a positive sales surprise. Earnings growth has been 24.6% versus the expectation for 20% coming into the Quarter. FactSet also said if this trend holds,it will be the second-highest Quarterly growth since the 34.1% growth in the third Quarter of 2010. As we are in the back half of 2018, the focus of Money Managers is on the multiple versus 2019 expectations instead of 2018. The five-year average has been 16.2 times. Analysts expectations for 2019 earnings now sit at $178.12, which has risen by 0.9% over the past month. Placing a 16.2 times multiple on $178.12 in earnings creates an S&P target of 2885.54. That would be a fair value target using recent history as a predictor. The current estimate for 2019 will not stay unchanged. It is going to rise as analysts update their estimates. Money Managers are still underinvested in US Stocks. Recent data indicates that their cash allocation sits around 4.7% versus the 10-year average of 4.5%. Remember, many have charters that do not allow them to sit on more than 5% in cash. They are near top levels in terms of cash allocation. If the market refuses to pull-back, at some point that money will chase- in other words, they will invest. And if the market does pull back, there is a good chance the sell-off will be short lived. In my opinion as long as we hold the 2790/2810 support area this supports the case for owning the S&P.
Today was my worse points loss since I started this Daily Commentary in February 2012. The losses today were enhanced by the fact that I was stopped out of so many markets near the lows of the day and I now have to consider using wider stops and smaller stake size to alleviate this problem.
Today I will again look to buy the S&P on any dip lower to 2811/2819 with a 2804 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer from 2787/2796 with a 2780 tight stop. I no longer want to be short the market at this time.
EUR/USD
In comparison to the stock markets the Euro traded in a narrow range yesterday and I am still flat. The Euro is oversold after its huge move lower from its April high near 1.2550. Today I will move my buy level higher to 1.1260/1.1320 with a 1.1215 stop.
September Dollar Index
The Dollar just missed my 96.95 sell level before having a nice sell-off into the New York close. The DSI for the Dollar has now reached 96% bulls which is the highest level of trader optimism since December 15, 2016. Today I will now lower my sell level slightly to 96.90/97.35 with a 97.65 stop.
September DAX
With so many of my markets hitting at the same time yesterday I know most of you will only have three open positions on board at the same time. Unfortunately after I bought the DAX at an average rate of 12190 I was stopped out of this position near the loa of the day at 12125 before the market turned around and rallied into the New York close and I am still flat. The DAX has strong support from 12000/12100 and this are must hold or else this recent sell-off could turn nasty. Today I will again look to buy the market on any dip lower to 12010/12090 with a 11960 stop. Given how oversold the DAX is trading I do not want to be short the market at this time.
September FTSE
Yesterday as emailed to my Platinum Members I bought the FTSE at an average rate of 7500 before getting stopped out of this position at 7455 and I am now flat. The FTSE got hit hard yesterday despite the renewed weakness in Sterling which is a worry. Similar to the DAX above the FTSE must hold the key 7350/7400 support area or else this sell-off will accelerate to the downside. Today I will be a small buyer on any dip lower to 7375/7435 with a 7335 stop.
Dow Rolling Contract
The Dow certainly has been no friend of mine over the last week as three times the Dow came within a couple of points of my T/P level before accelerating lower yesterday to my second buy level at 25140. Subsequently I was stopped out of this now average 25235 long position at 25070 and I am now flat. I know the Dow then fell over 100 points before rallying 250 points into the close. The 24700/25000 is key support for the Dow which is where the 200 Day Moving Average (24703) and 50 Day MA (25004) are situated. Today I will again look to buy the market on any dip lower to 24870/25050 with a wider 24735 stop. Given how close we are to the key Moving Averages I do not want to be short the market at this time.
September NASDAQ
The NASDAQ traded the whole of my buy range yesterday for an average long position at 7350 before rallying into the close and in the process hit my 7365 revised T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 7280/7325 with a 7235 tight stop.
September BUND
Surprisingly the Bund traded in a narrow range despite the weakness in European Equities. I am still flat and today I will leave my buy level unchanged from 162.00/162.40 with a 161.70 stop. I will also leave my sell level unchanged from 164.15/164.65 with a 165.05 stop.
Gold Rolling Contract
Gold also traded lower and I bought the market at 1178. As I go to press Gold has got hit hard again. The Daily Sentiment Index shows just 7% of traders who are bullish Gold which is one of the lowest readings in many years. On top of this Gold has now hit a 19 month low. As a result I have now bought the market again at 1165 for a now average long position of 1171.50.I am still long and I will now lower my T/P level on this position to 1185 with a now lower 1156 stop.
Silver Rolling Contract
It was only 4 months ago that Silver was trading at 17.10. Yesterday the sell-off accelerated with the market now on course for its longest stretch of weekly losses since at least 1950. Yesterday’s aggressive move lower took me out of my 15.30 long position at 14.70 and I am still flat. Both Gold and Silver are trading well outside the bottom of their respective Daily Bollinger Bands. In light of this fact I will again look to buy Silver from 13.80/14.25 with a 13.45 stop. If I am taken long I will have a T/P level at 14.60.
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