The first day of trading for many markets was a memorable one, with some big falls in equity markets. With the plunge in risk appetite, the Yen was the best performing currency.
The bad start to the year really all began following Saudi Arabia’s execution of Saudi cleric Nimr al-Nimr, a critic of the kingdom’s treatment of its Shiite minority. Over the last couple of days, this has escalated tensions between Iran and Saudi Arabia and added to mounting Geopolitical risk in the Middle East. As strong words flowed back and forth between the two countries (and others, which butted in) oil prices went on a rollercoaster ride, with Brent crude rising to as high as $39 per barrel, having traded as low as $36.10 at the end of last year before the execution.
For anybody following my new Platinum Service it made 139 points yesterday. The previous seven months saw gains of 2065, 1510, 1600, 2833, 2195, 1810 and 3045 points respectively. If anyone is interested in my Platinum Service please check out the link on my tradernoble.com website.
On the economic front, the release of China’s latest Caixin PMI, showed a modest miss relative to expectations, coming in at 48.2 versus 48.9 expected. Signs of further economic manufacturing contraction in China, along with the imminent ban on share trading by major shareholders about to be lifted, sparked a significant fall in Chinese equities. After falling by 5%, the first circuit breaker was triggered, and trading eventually halted after the CSI-300 had fallen by 7% for the day. Other Asian markets were affected, with Japan’s Nikkei down 3.1% and the Hong Kong’s Hang Sang index down 2.7%.
So there was enough bad news lurking around before the beginning of the European/US trading sessions, but manufacturing data added to the concerns. In the UK, the Markit PMI fell to 51.9, well below market expectations of 52.8. The US ISM manufacturing index fell to 48.2 compared to expectations for a rise to 49.0. Amongst the detail, the Employment component was particularly weak, falling to 48.1 compared to 51.3 the previous month. As if that was not enough bad news, Construction Spending data showed a 0.4% m/m contraction in November, well below market expectations for a 0.6% increase. Lost in the mix of bad data was a European manufacturing PMI figure that was broadly in line with expectations at 53.2.
The combination of Geopolitical concerns in the Middle East, weak economic data in China and the US, and thin holiday trading markets was a deadly one that saw some big moves in equity markets. Following the carnage in Asia, Europe’s Stoxx 600 index fell by 2.5%, the FTSE100 fell by 2.4%, Germany’s DAX was down by 4.3% and the S&P500 closed 1.5% lower after a 1% rise in the last hour of trading. This is one of the weakest ever starts to trading for equity markets. Thankfully, the first day of trading for the year has no predictive power for the rest of the year.
In currency markets, the Yen flourished. USD-JPY traded as low as 118.70, after being around 120.30 before the Chinese PMI data were released. There has been a recovery of sorts for the US dollar, with the cross currently sitting at 119.25.
Notably, the US dollar has also been well supported, and is the second strongest currency of the majors, even managing to eke out a small gain against the Swiss franc in this risk-off environment.
EUR/USD has traded in a roller-coaster like fashion. After trading at 1.0827 before China’s PMI, the cross zipped up to 1.0946, before falling to 1.0781 after lunch, and it currently sits at 1.0810. GBP/USD largely followed that ride, trading in a range of 1.4663-1.4816 and currently sits at 1.4712.
Hardest hit were the EM and Commodity currencies. In the last 24 hours the NZD has been the hardest hit. NZD/USD is down 2%, trading as low as 0.6720, and currently sits at 0.6750. The NZD was well overdue for a downward correction, following its strong spurt in December. In December, NZD/USD was up 3.8%, being the strongest performing major currency, despite lower risk appetite, falling commodity prices, and a narrowing NZ-US short rate spread.
Despite the carnage in equity markets, US Treasuries showed only a modest fall. The 10-year rate drifted lower in a fairly orderly fashion and currently sits 3bps lower at 2.24%, having traded in a range of 2.20-2.29% over the past 24 hours.
Investors still expect only a modest increase in the Fed Funds rate this year, closer to two 25bp increases, rather than the four rate hikes projected by the median FOMC member. The US 2-year rate sits at 1.03%, having traded as high as 1.10% at the end of last year. Markets are opening firmer this morning after the Shanghai stock market reversed earlier losses to close flat for the trading session.
If the last 24 hours is anything to go by, 2016 is shaping up to be an interesting year. Buckle your seatbelts.
This morning on the economic front we already had the release of German ILO Employment which printed +41K versus 32K previously. We just had the release of Spanish Employment which fell 55,000 worse than the 50K fall expected and much higher than the previous month’s fall of 27K. At 9.30 am we have UK Construction Spending PMI. This is followed at 10.00 am by Euro-Zone CPI. Finally at 2.45 pm we have the New York ISM on what is a very light day for US data.
March S&P 500
By 8.00 pm last night the S&P was on track to post its worse start to a new trading year in 84 years before a late dramatic rally in the last hour of trading saw the S&P rally by 26 Handles to close just 1.5% lower. This was still the worse start since 2008. Yesterday’s massive move lower has left a huge ‘open Gap’ from last Thursday’s close at 2035.50 to last night’s high which was the high for the day at 2010. The last three trading days have done some serious technical damage to the US Stock markets but as we have seen in the past 12 months and particularly the last five months that any sell-off has led to huge buying as the Central Banks do whatever it takes to keep the stock market alive considering how much QE they have spent in the process. The break and close below 2040 on New Year’s Eve could be significant and it will take a lot of good news to break back above this level. Yesterday my S&P plan worked well as shortly after I posted the S&P traded lower to my 1997 buy level before having a quick rally which enabled me to cover this position at 2002 and I am now flat. For anybody who followed my 5 Handle Rule in yesterday’s trading they would have had a spectacular trading session as after the S&P traded as low as 1979.75 my 5 Handle Rule would have kicked in at 1985 before the market rallied to close at 2010. Today I will use any rally higher to 2026/2036 to go short in small size with a 2042 stop. I have to use wider levels given the volatility. Despite the aggressive sell-off over the past few trading sessions we are not oversold as shown by the McClellan Oscillator which only closed with a negative -32 reading from last Thursday’s close at +28. My only interest in buying the S&P is on a dip lower to 1984/1991 with a 1978 stop. Again if I am taken long and subsequently stopped out of this trade I will use my 5 Handle Rule to go long again with a stop below whatever new low is printed.
EUR/USD
My idea of buying the Euro yesterday morning at 1.0895 was totally wrong as shortly after I posted the Euro spent the rest of the trading session trading lower before eventually stopping me out of this trade at 1.0855 and I am now flat. The break and close below 1.0850 is bearish. However given my view that the US is in or close to entering a recession I just cannot bring myself to buy the US Dollar. Today I will again look to buy the Euro on any further dip lower to 1.0690/1.0740 with a 1.0655 stop. Otherwise I will just stay flat and observe the price action.
March Dollar Index
Shortly after I was stopped out of my long EUR/USD position the Dollar traded higher to the top of my sell range at 98.90. As I do not seem to have an edge in the Dollar at this time I was also stopped out of this short position for a small loss at 99.25 and I am now flat. The key level to watch for the Dollar is from 100.35/100.65 which where we had the double top from last April and again in December before the famous ECB Meeting. As I have mentioned on many occasions a break and close over 101 will be extremely bullish and opens up the possibility of a move higher to at least 1.08. Today I will again look to go short on any move higher to 99.80/100.10 with a 100.40 stop.
March DAX
My idea of buying the dip below 10300 worked very well as twice we entered this buy level before having a nice rally on both occasions. The DAX traded as low as 10247 before trading as high as 10400 on the open this morning. Yesterday I bought the DAX at 10280 and 10250 before selling these positions at 10320 and 10290 respectively as outlined earlier to my Platinum Members and I am now flat. The DAX having opened higher is on the defensive again and I will use any further dip to 10180/10230 to go long with a 10140 stop. Given how weak the Euro is trading I do not want to be short the DAX at this time.
March FTSE
The FTSE plan also worked well yesterday with the FTSE trading down to my 6040 buy level before having a nice 90 point rally. Unfortunately as I was long so many Indices at the one time I covered my long position too early at 6060 and I am now flat. Today I will again look to buy the FTSE on any dip lower to 6020/6055 with the same 5995 stop.
Dow Rolling Contract
My idea of buying the first dip in the Dow worked well yesterday as shortly after the Dow traded lower to my 17100 buy level I emailed all my Platinum Members to exit this position at 17150 and I am now flat as I did not do another Dow trade after cutting this position. Today I will again look to buy the Dow on any further dip to 17010/17070 with a 16960 stop. Despite the negative price action I do not want to be short the market at this time.
March BUND
No change as I am still a small seller on any rally higher to 159.25/159.55 with a 159.80 stop.
Gold Rolling Contract.
I am still flat Gold which has tried to rally again but keeps finding the resistance level at 1080/1090 hard to break. Today I will raise my buy level slightly to 1060/1068 with a 1054 stop.
Silver Rolling Contract.
Finally Silver had a nice rally yesterday which enabled me to T/P on my long 13.81 position at 14.10. I have bought Silver again this morning at 13.92 with a 13.40 stop.
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