China did what the market was looking for by easing Monetary Policy just as I posted yesterday morning, but it appears that the markets want more. Thanks, but we are not quite happy yet. After a very weak equity session in China yesterday, China’s PBoC announced in the London session, that they were cutting the reserve requirement for banks by 50bp (expected) to 18% and that they would ease interest rates 25bp for one year lending (to 4.6%) and deposit rates (to 1.75%). This was not expected, but it wasn’t a bazooka either. It did, however, lead to a surge in European and US equities, Oil prices were higher, Bond Yields higher and the USD recovered.
For anybody following my new Platinum Service it made 350 points yesterday having lost 135 points on Monday and is now ahead by 1287 points for August. The previous two months saw gains of 1810 and 3045 points respectively.
EM currencies enjoyed it too. We will know more today, but it seems that in the last hour of US trading, markets have assessed it and decided that the policy isn’t enough. The Dow ended the day -1.3%, the USD is selling off, as is the AUD. In the AUD, we are back where we were at the start of yesterday. This is despite the Shanghai equity market dropping -7.6% yesterday, and the Dow being up over 3% earlier yesterday. Measures of risk aversion, such as the VIX are still elevated, which makes it difficult for the AUD. It is a positive step that Chinese policy makers have chosen to address the economy rather than prop up the equity market directly. The Chinese equity market does not make up a huge proportion of local wealth, the importance here is on household and consumer sentiment (released today).
But far more important, and potentially worrying, has been the rise in interest rates. A lot of debt has been generated on the back of low interest rates. And, not all is long dated debt. Current interest rates are rising, as a result of the currency intervention to prevent CNY weakening even further post the recent relaxation of the currency management regime. As rates rise, it becomes more expensive to roll that short dated debt. Then, add the pressures of debt that is denominated in USD as the currency weakens. Thus the current pressures are not about just the equities but broader than that. So the policy to cut the reserve requirement and interest rates is a step in the right direction.
The reaction in the US appears to be that more might be necessary. It was also positive to see that in the announcement was a mention of the fact that over one year deposit rates would no longer be capped. This adds to the liberalisation of deposits. It also makes sense of the news yesterday that there would be a clamping down of non-official banks.
The German IFO, at least, was encouraging, by rising more than expected. The US markets have been busy removing the probability priced of the Fed hiking this year: sorry, you may have missed your chance they are suggesting (a small amount is still priced). But the US economic data was pretty good yesterday, with Consumer Confidence and House prices both rising.
This morning the Chinese Stock market which was up 3% earlier is pairing back those gains as I write this commentary and is now flat.
Today is very light on the economic front with no data of note due from either the Euro-Zone or the UK. This afternoon we have US MBA Mortgage Applications and Durable Goods Orders at 12.00 pm and 1.30 pm respectively. Finally at 3.00 pm the Fed’s Dudley will speak at a press briefing.
September S&P 500
I was extremely unlucky with my sell level in the S&P at 1950 as three times we tested this level but each time we only got to a high of 1948.50 before the market got absolutely hammered in the last two hours of trading with the S&P trading 90 Handles lower to 1859 thus hitting my 1870 buy level in the process. The market has a nice rally overnight on the higher opening in the Chinese stock market which enabled me to cover this position at 1892 as outlined earlier to my Platinum Members and I am now flat. I must say the volatility is just incredible and unless the S&P is able to break back and close above the now major resistance at 1950/1980 we could have put in a top that lasts for more than just a few months. The McClellan while improving slightly still closed at a very oversold print of -297 from Monday’s -335 reading thus making it difficult for me to short the market here. Today I will look to buy the S&P on any dip lower to 1840/1863 with an 1825 stop which is just below last Monday’s low print. If I am stopped out of this position I will be a more aggressive buyer in front of 1810 with a 1778 stop. I will also lower my sell level to 1935/1950 with a 1960 stop which is just above yesterday’s high.
EUR/USD
The Euro plan also worked well yesterday as the market had a nice sell-off after lunch which enabled me to buy the Euro at 1.1410 before the market had a nice rally on the late selling in the US equity markets which enabled me to cover this position at 1.1470 as outlined earlier to my Platinum Members and I am now flat. Today I will again look to buy the Euro on any dip lower to 1.1370/1.1410 with a 1.1335 stop. I do not want to be short the Euro at this time.
September Dollar Index
I am still flat the Dollar and given the fact how important the 92.80/93.30 support level is I will be a buyer in this area with a 92.40 stop.
September DAX
The DAX plan also worked well yesterday as shortly after I posted the DAX was trading at my 9965 sell level with a 9975 high before having a quick 90 point sell-off which enabled me to cover this position at 9900 as again outlined to my Platinum Members and I am now flat. Today I will raise my buy level to 9720/9800 with a 9650 stop. Given how oversold the DAX is trading I do not want to be short the market at this time.
September FTSE
The FTSE plan finally worked out as the market had a nice sell-off shortly after the open overnight which enabled me to but the market at my 5910 buy level. Subsequently the FTSE followed the S&P higher which enabled me to cover this position at my 5970 take profit level and I am now flat. Given how oversold the FTSE is currently trading I do not want to be short the market at this time. Today I will look to buy the market on any dip lower to 5880/5920 with a 5840 stop.
Dow Rolling Contract
What a wild trading session the Dow had again yesterday as it made a high at 16376 shortly after the US markets opened before having an incredible 800 point sell-off. I am just waiting for the news to hear which major Hedge Fund or bank is in serious trouble as there is no way that main street has escaped unscathed. The drop lower in the Dow has led me to go long at my 15850 buy level. I am still long and today I will use any rally higher to 15900 to cut this position. I will also raise my stop on this trade to 15780. If I am stopped out or manage to take profit on this position I will be a more aggressive buyer in front of 15550 with a wider 15300 stop.
September BUND
The BUND just got slammed yesterday with the market 300 points lower than Monday’s high print. Today I will be a small buyer from 153.40/153.80 with a tight 153.15 stop.
Gold Rolling Contract
No change as I am still a small buyer from 1122/1130 with the same 1114 stop.
Silver Rolling Contract
As expected I was stopped out of my long 15.15 position at 14.60 and I am now flat. Today I will be a small buyer on any further drop to 14.00/14.30 with a 13.70 stop.
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