Direction was taken from the weakness in the Chinese equity market yesterday, with yesterday’s 6.15% drop in the Shanghai equity market prompted further declines in EM currencies and developed market equity markets were broadly lower. That theme has continued overnight with the market closing down a further 4%. The anomaly was higher yields. The US Dollar was stronger, with the oil producer Norway underperforming, followed by EUR. GBP outperformed afters its higher inflation outcome. The drop in China’s equity markets highlights the settling process that markets go through as they adjust to different regulatory systems.
For anybody following my new Platinum Service it made 220 points yesterday and is now ahead by 1057 points for August. The previous two months saw gains of 1810 and 3045 points respectively.
An opening up of domestic, as well as foreign, access leaves China open to changes in sentiment and valuation judgements. Yesterday’s move doesn’t have one specific “reason” but a combination of fears arising from: modestly rising house prices announced yesterday may mean that there is less than expected policy easing ahead, or the largest liquidity injection into the money market via 7 day repos since the Lunar New Year yesterday (CNY120bn) failed to ease Bond Yields as had been hoped, or there were suggestions of an easing of the short selling rules. Or any other cause you might want to mention. With little going on elsewhere, it dominated the sentiment of global markets.
The capital outflows from EM are getting more and more attention and causing a greater amount of volatility in those markets. It has yet to really leech into developed markets. And that is fair; the re-pricing of the risks in these markets from a weaker China and a policy normalisation from the Fed are predominantly in these markets. But, the ball is rolling now, today the FT reports on the over $1tn outflows from EM in the past 13 months – more than during the financial crisis. That has the potential to slow economic growth, and in turn, that can tend to weigh on the AUD.
In the UK, the questions surrounding the BoE’s next hiking cycle returned, after a higher than expected pick- up in inflation. Now don’t get excited, headline inflation remains at 0.1%yoy, but that is better than flat or negative as it has been. And, the core was a whole +1.2%yoy (0.9E, 0.8P) and with the comments from the BoE regarding the possibility of hiking, this brings the debate back on the table, despite the Governor’s will they – won’t they approach of late. It helped GBP outperform on the day. In the US, the interest rate cycle lift-off is the persistent theme. The Starts and Permits data were as could be expected, with Starts higher and Permits volatile and influenced by a change in building codes.
This morning on the economic front we have the latest ECB Current Account and Euro-Zone Construction Output and 9.00 am and 10.00 am respectively. This is followed at 12.00 by US MBA Mortgage Applications. At 1.30 pm we have US CPI. Finally at 7.00 pm we have the latest FOMC Minutes from the last Meeting. The FOMC minutes will be dissected to see just how close the Fed are to a hike (was it “many” who are looking to normalise policy?), and what their bias and concerns are. Market wisdom at present, gleaned from various speeches, that there is likely to be a move unless the data deteriorates (what prompted the introduction of the word “some” improvement in the labour market?)
September S&P 500
The S&P plan worked well yesterday as shortly after I posted the S&P traded lower to my 2092 buy level before having a nice rally after the US Markets opened which enabled me to cover this position at 2099 as outlined earlier to my Platinum Members. The S&P is opening on the defensive this morning with the news that the Chinese stock market has closed down another 4%. However with the really important FOMC Minutes due at 7.00 pm this evening I have bought the S&P here at 2087 as I look for the market to rally ahead of this announcement. I will leave a 2082 stop on this position and if I am stopped out of this trade I will be a more aggressive buyer in front of 2074 with a 2068 stop. My only interest in selling the S&P at this time is still on a rally higher to 2107/2112 with the same 2116 stop. Remember I am still not keen to go short until we get Friday’s Options Expiry out of the way.
EUR/USD
The Euro plan also worked well on Friday as shortly after lunch the Euro traded lower to my 1.1025 buy level before having a nice rally overnight which has enabled me to cover this position at 1.1060 as indicated in a separate email to my Platinum Members and I am now flat. Today I will again be a small buyer on any dip lower to 1.1000/1.1030 with the same 1.0970 stop.
It is interesting that as soon as the Fed starts to raise rates the US Dollar tends to weaken by 5/8% subsequently.
September Dollar Index
No change as I am still a seller on any rally higher to 97.25/97.55 with a 97.80 stop.
September DAX
This morning the DAX opened below my buy level and stop and I am still flat. This morning’s opening again highlights how dangerous it is to have an ‘Open Dax’ position overnight as the lack of liquidity as mentioned in yesterday’s commentary again been a key factor. The major support for the DAX comes in at 10650 which the low made at the height of the recent Greek crisis and I would expect the market to having difficulty in break this major support initially. Today I will be a small buyer on any dip to 10660/10740 with a wider 10610 stop. Again as I mentioned yesterday I am only trading in 1/3 of my normal stake size for this market. Despite the negative price action I do not want to be short the market at this time.
September FTSE
Unfortunately after the FTSE traded lower to my 6505 buy level shortly after I posted yesterday morning I was stopped out of this position overnight at my 6475 stop level and I am now flat. Today I will again look to buy the market on any dip lower to 6420/6455 with a 6395 stop.
Dow Rolling Contract
The Dow plan also worked yesterday with the market having a nice dip after I posted which enabled me to go long at 17485 before having a nice rally to my 17540 take profit level as outlined earlier to my Platinum Members and I am now flat. As I still expect the market to stay bid until at least we get Friday out of the way and the fact that the Dow has been so resilient in the face of what is going on elsewhere I will again look to buy this market on any dip lower to 17380/17430 with a 17330 stop which is just below last Monday’s spike low print.
September BUND
My short 155.05 BUND position worked well yesterday as the BUND had a nice sell-off after the US markets opened which enabled me to cover this position at my 154.70 take profit level as again outlined earlier to my Platinum Members and I am now flat. Today I will again look to go short on any rally higher to 155.15/155.40 with a 155.75 stop. I still do not want to be long the BUND at this time.
Gold Rolling Contract
My Gold plan also worked out very well yesterday with Gold trading lower to my 1110 buy level before having a nice spike higher to my take profit level at 1119 as again outlined to my Platinum Members and I am now flat. Today I will again be a small buyer on any dip lower to 1106/1114 with a 1099 stop.
Silver Rolling Contract
Unfortunately I was stopped out of my long 15.30 position for a small loss at 14.95 yesterday afternoon. The major support for Silver is still from 14.30/14.50 which was the low made earlier in the year and because I had god trading day yesterday I have decided to buy Silver again this morning at 14.90. I will leave a wider 14.20 stop on this position.
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