Yesterday was one of the most dramatic trading sessions that I have witnessed in my 30 years of trading as the Dow which opened down an incredible 1089 points subsequently rallied 900 points only to get hit again into the close for a 588 point fall. Feeding off Monday’s 8.5%plunge in the Shanghai index and not much else, US stock markets closed with the S&P500 down 3.92%, the NASDAQ -3.81% and the Dow 3.56%. This masks much more extreme intraday volatility and which saw Indices down more than 5% earlier in the US session. The ‘fear gauge’ soubriquet commonly applied to the VIX (a measure of the volatility of the S&P 500 option market but which only goes up when stocks go down) hit a high of 53% today. Earlier this month it was trading below 11, so a rally of 487% from intra month low to high (so far).
The fallout from the Chinese debacle is really hitting both the Australian and New Zealand Dollar which are both highly risk sensitive currencies and were both the worst performers in the G10 Currency arena by a considerable margin. AUD is down 3% on Friday’s close and the NZD -2.15%. Pure volatility aside, we also need to remain highly cognizant of the strong correlation between the AUD and Asian EM currencies. More pressure on the latter today almost certainly means more downward pressure on the AUD at some point. In this regard, the fixing of the USD/CNY rate by the PBoC this morning will be a very key focal point, after the central bank failed last night to do its now customary job of intervening to push USD/CNY into the onshore close. Instead, USD/CNY blew out to above 6.40 from below 6.39 on Friday. USD/CNH is closed in New York around 6.50, about 0.75% up on the day. Though other Asia currencies has arguably already weakened in anticipation of further depreciation in the RMB, a higher fix today may well elicit a familiar feedback loop back to the currencies in the rest of the region. If there is a surprise looking at yesterday’s currency scoreboard, it is perhaps that currencies that have become quite pure Oil price plays – CAD and NOK, have fared worse (Oil is off 5.75-6.5%). The Canadian dollar is off little more than 0.5% and the NOK less than 0.2% lower.
Less surprising is that the JPY – the traditional bastion of safe haven support in a crisis – has fared best with a near 3% gain (at one point USD/JPY traded as low as Y116.18). Japan may no longer be running large current account surplus but it enormous stock of external assets makes the currency ripe for large scale repatriation flows in a crisis. Also unsurprising is Euro strength (+2%) and where we continue to see purging of short positioning (more so we suspect in spot and options than currency futures).
Perhaps the other surprise to some is that US bond yields aren’t lower, especially at the front end of the curve (2yr Treasuries 4.5bps lower at 0.568%). That the US Dollar is not stronger might be part of the story here, while incoming Fed speak is holding to the view that the US central bank will still make a first move on rates this year (really?). Dennis Lockhart, considered a centrist and a current FOMC voter, has just said that the Yuan, Dollar and Oil prices all complicate the US outlook (no mention of stocks of course), but that he expects the Fed to begin raising rates this year. Meanwhile ex-Dallas Fed President Richard Fisher told CNBC markets yesterday were quite orderly. He sounds more like an investment banker who just might be short of equities than a policy maker. Oh wait – he is.
Surprisingly the markets are opening better this morning when you consider the China closed down another 7% for a 21% drop in four days. Unprecedented Government intervention has failed to stop a more than $4.5 trillion rout since June 12 amid concern the slowdown in the World’s second largest economy is deepening. Meanwhile the Nikkei has just closed down another 4% at 17806 and is now over 15% lower from its recent high.
This morning on the economic front we already had German GDP which came in as expected at +0.4. At 9.00 am we have the German IFO Survey. This is followed at 2.00 pm by the US House Price Index. At 2.45 pm we have the US Services PMI. Finally at 3.00 pm we have US New Home Sales, Consumer Confidence and the Richmond Fed Manufacturing Index
September S&P 500
I must confess having witnessed the 1987 crash, the 1998 Emerging market crisis, 9/11, the GFC crisis of 2007/2009 and finally the ‘Flash Crash’ of May 2010 none of these compared in points movement as to what happened in the S&P since last Wednesday evening. Remember post the Fed Minutes which were released just before 7.00 pm last Wednesday the S&P was trading at 2093 only to fall to an 1830 low shortly after the US markets opened yesterday afternoon before mounting the mother of all rallies to 1950. Subsequently the market fell hard into the close at 1880. This morning the S&P is trading 30 Handles higher. Yesterday’s close across all the US Indices has resulted in the most oversold conditions that I believe I have ever witnessed. We are so far outside the Daily Bollinger Band and interestingly the McClellan Oscillator closed with a reading of -335 coupled with the VIX closing at 48 makes this market a definite buy for at least a short term bounce. The key question today is where to buy the market? Given the fact that the S&P is having 10/15 Handle price moves every few minutes it makes trading extremely difficult without having a large stop. The huge move lower over the past few days will see massive margin liquidation calls later today and I am hoping the S&P will trade back to 1840/1875 where I will be a buyer with a 1825 stop which is just below yesterday’s low. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer in front of 1800 with a 1770 stop. Yesterday’s afternoon’s rally high to 1950 is key for this market going forward as the break of this previous major support level has resulted in long-term players exiting their positions. Today I will also be a small seller on any rally higher to 1950/1975 with a 1985 stop.
EUR/USD
Incredible the Euro has now moved 700 points higher in just one week as every short just got squeezed. If the Euro does not fall soon ECB President Dragi will not be a happy man. Yesterday after I posted I went short the Euro at 1.1520 only to be stopped out of this position for a small loss at 1.1575 and I am now flat. The Euro subsequently spiked higher to 1.1710 when the Dow opened 1100 points lower before selling off after the Dow started to rally. The Euro is extremely overbought after its huge move higher over the past few days and today I will again be a small seller on any rally higher to 1.1590/1.1630 with a 1.1670 stop. I will also be a small buyer on any dip lower to 1.1370/1.1420 with a 1.1340 stop.
September Dollar Index
Just like the Euro above after going long the Dollar at 93.80 I was very quickly stopped out of this position at 93.30 after the key 93.50 level was violated and I am now flat. The Dollar is back trading above 93.50 this morning and today I will be a small buyer on any dip lower to 92.70/93.20 with a 92.45 stop which is just below yesterday’s low.
September DAX
Incredibly the DAX has fallen nearly 22% in just 10 days. To me this is not a one-off event and it is going to take something extremely special to get these markets back on a firm footing. Yes there will be bounces along the way and these will be violent but overall the stock values of these companies are still too high. To me the key economic point over the past few years is the lack of high paying jobs been created despite seven years of stock market gains. The DAX plan worked well yesterday as shortly after I posted the DAX traded lower to my 9830 buy level before having a nice rally to 9920 which enabled me to cover this position at 9910 and I am now flat. To think that the DAX then fell to 9350 before trading all the way back to 9920 is just unbelievable. Today I will be a small seller on any rally higher 9950/10020 with a 10060 stop. My only interest in buying this market is on a dip to 9400/9460 with a 9325 stop.
September FTSE
My long 6010 FTSE position from yesterday again fell short of my 6075 T/P level and I was eventually stopped out for a small loss at 5950 and I am now flat. There is no doubt in terms of price movement the FTSE is the cheapest market to trade at this time. The FTSE is started this whole move lower as when the US Indices were making new highs the FTSE refused to join in and is now down 18% from its April highs. Today I will be a small buyer on any dip lower to 5880/5920 with a 5840 stop. I still do not want to be short the FTSE at this time.
Dow Rolling Contract
To think the Dow was trading at 15250 yesterday afternoon and is now back above 16100 this morning having closed at 15871 just gives you an idea of the incredible volatility going on in the markets. As I mentioned in my main commentary above I have never seen such volatility and it is impossible for me to give a call in the Dow at this time as the moves are so quick. However given the extreme McClellan Oscillator reading at -335 for yesterday’s close I will look to buy the Dow on any dip lower to 15850/15920 with a 15480 stop.
September BUND
The BUND plan worked well yesterday as the market had a nice rally to my 156.30 sell level shortly after the US markets opened before selling off which enabled me to cover this position at 155.75 and I am now flat. There is no doubt the BUND is having great difficulty in breaking 156 and today I will again look to go short on any rally higher to 155.70/156.00 with a 156.30 stop.
Gold Rolling Contract
No change as I am still a small buyer on any dip lower to 1122/1130 with the same 1114 stop.
Silver Rolling Contract
No change as I am still long at 15.15 with the same 14.60 stop. If I am stopped out of this position I will be a more aggressive buyer in front of 14.35 with a 13.95 stop.
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