A quieter past 24 hours, with no large moves, but no strong reversals either. US Equities closed slightly higher, while Europe was still weak. Bond Yields were a little lower and currencies in G10 for the most part flat. Oil did rise and Glencore, yesterday’s prophet of doom, bounced 17%. Markets are displaying signs of distress as concerns around EM risk tolerance return in force. This is added to by the additional liquidity needs in Asia for the long holidays later this week. This has led to an extraordinary drop in G10 yields and rise in EM yields.
For anybody following my New Platinum Service it made 260 points yesterday and is now ahead by 2773 points for September. The previous three months saw gains of 2195, 1810 and 3045 points respectively.
Concurrently, EM currencies are weaker and funding currencies such as JPY, and EUR (in this cycle) are stronger. The typical behaviour for the high yield, commodity currencies (AUD and NZD) are in place. They are under pressure. Measures of market volatility are higher, with credit spreads much wider, VIX (equities) has risen again and MOVE (bonds) has shot higher. EM central banks are implementing their contingency plans by increasing liquidity in the local market (HK), providing USD swaps to local corporates (Brazil) and intervening in the local currency (multiple).
Yesterday, the IMF warned of the $18 trillion Emerging Market Corporate Bond Market. To give you an idea of the strains confronting some EM countries, the 10-year Bond Yield in some are presently at the highest level in 12 months. Compare this to the “norm” in many G10 and the more solid EM countries, where the yield is at its lows for the last 12 months. Historically, the stretched EM yields are still below peaks, but this rise in risk premium is another expression of market concern regarding underlying fundamentals. This is classic risk repricing, where countries with current account deficits, foreign denominated debt, and particularly commodity exporters, are responding to changing global conditions. This risk repricing is beyond any debate about the Fed raising interest rates 25bp or not.
The nervousness in EM is translating, in this global interconnected world, to corporates who deal with EM, to economies reliant on global demand, and commodity exporters, like Australia, and that is why Australian equities were down over 3% yesterday, the ASX 500 cracking the 5000 level. (Japan and others also broke key levels). Given all this, the less significant economic data isn’t going to create much of a dent in market interest. That said, it was odd that US consumer sentiment bounced, as did European sentiment.
On the negative side, was the US advance Trade Numbers. This is for goods only, but it showed a big rise in the deficit as exports dropped 3% and imports rose 2%. That will weigh on GDP estimates. In Germany yesterday’s CPI release was again soft.
This morning Equity markets are rebounding helped by the 2.7 % gain in the Nikkei which closed back above the key 17,000 pivot point. Today is Month and Quarter End on what has been one of the most dramatic Quarter’s for trading in many a year.
This morning on the economic front we have German Unemployment at 8.55 am. This is followed at 9.30 am by UK GDP and Current Account Balance. At 10.00 am we have Euro-Zone Unemployment and CPI. The US will release its latest ADP Employment Change and this will be closely watched by the markets for any clues ahead of Friday’s Non-Farm Payrolls. Finally we have the Chicago Purchasing Manager’s Index at 2.45 pm. Speaking today we have the Fed’s Dudley who is due to speak on Market Liquidity at 1.00 pm, while Fed Chair Yellen and Bullard will speak on Community Banking at 8.00 pm.
December S&P 500
It took a while but finally the S&P plan worked very well yesterday as very late in the US trading session the S&P traded lower to my 1865 buy level with a 1861.75 low before having a nice rally into the close which enabled me to cover this position at my 1875 T/P level as outlined earlier to my Platinum Members and I am now flat. This morning the S&P is trading higher at 1891 and this is the second time that we have had a 30 Handle rally off the now key support at the 1860/1860 area. The markets are higher this morning due mainly to the 2.7% rally in the Nikkei plus the fact that today is Month and Quarter end. This morning’s move higher has the potential to leave another large ‘Open Gap’ if not filled when the US markets open. Today I will be a buyer on any dip lower to 1871/1877 with a 1866 stop. If I am taken long and subsequently stopped out of any long position I will be a very aggressive buyer on any further dip lower to 1832/1845 with an 1822 stop. Remember we still have two large ‘Open Gap’s above the market from 1913/1922 and 1946/1964. Despite the negative price action I still do not want to be short the market at this time.
EUR/USD
The Euro plan again worked well yesterday as shortly before lunch the Euro traded lower to my 1.1205 buy level before having a nice rally which enabled me to cover this position at my 1.1240 T/P level as emailed earlier to my Platinum Members and I am now flat. One of the main reasons why I do not want to be short the Euro is on the recent comments from Charles Evans the Chicago Fed President who said that the US will not achieve its 2% inflation target until at least 2022. If these comments even prove to be half right then there is no chance of a Fed Rate Hike until well into 2016. If this is then the case the Euro has the potential to trade higher to at least 1.20 as no Central Bank wants a strong currency in this deflationary environment. Today I will again be a small buyer on any dip lower to 1.1160/1.1200 with a 1.1130 stop.
December Dollar Index
The Dollar plan also worked well yesterday as shortly after I posted the Dollar traded higher to my 96.35 sell level before subsequently selling off after the US markets opened which enabled me to cover this position at my 96.00 T/P level and I am now flat. Today I will again be a seller on any rally higher to 96.40/96.70 with a 97.10 stop.
December DAX
The 9350 level is now key support for the DAX which had briefly broken this level early yesterday morning before turning around and trading 300 points higher this morning. I am still flat the DAX which just missed my 9345 buy level after the US markets opened with a 9380 low print. I am going to stay flat as I am not going to chase the market higher form here unless we trade lower to 9500/9560 where I will be a small buyer with a wider 9450 stop.
December FTSE
The price movement in Glencore is just incredible as the share price fell 29% on Monday only to rebound by 17% yesterday and this has helped the FTSE to rebound from its extremely oversold condition early yesterday morning. I am still flat the FTSE and today I will raise my buy level to 5920/5950 with a 5895 stop. Given today is Month and Quarter End I do not want to be short the FTSE at this time.
Dow Rolling Contract
Unfortunately the Dow twice missed my 15920 buy level by 20 points after the US Markets opened yesterday and I am still flat which is very frustrating when you see the Dow trading over 16200 this morning. Today I will move my buy level higher to 15980/16040 with a 15930 stop which is just below yesterday’s low print. Just like the other markets above the fact that today is Month and Quarter End I do not want to be short the Dow at this time.
December BUND
No change as I am still short at 156.30 with the same 156.70 stop.
Gold Rolling Contract
The Gold plan also worked well yesterday as the market was trading at my 1126 buy level by the time I posted yesterday morning. I was very lucky with my 1135 T/P level as outlined earlier to my Platinum Members as Gold spiked higher to an 1135.3 high shortly after the US Markets opened and I am now flat. This morning Gold is again trading heavy and there is no doubt the market is having grave difficulty in breaking the key 1150/1160 resistance level. Today I will again be a small buyer on any dip lower to 1104/1114 with a 1095 stop.
Silver Rolling Contract
No change as I am still long at 14.75 with the same 14.30 stop.
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