Originally published by AxiTrader
Market Summary (7.34 am)
Stock markets across the globe are lower again this morning as the selling continues.
And while at 5am it didn’t feel like a full blown rush for the exits the panic between then and now has been palpable. The Dow was down more than 6% at one point and gold and the yen have caught a bid in the past hour. Likewise the US 10 year bond which was at 2.82% 60 minutes ago has now rallied 5 points.
Traders are getting nervous there is more to come.
On forex markets, the US dollar is doing better after Mario Draghi reminded traders euro strength is unhelpful for the achievement of the ECB’s inflation goal.
PMI’s across the globe were pretty solid.
But stock market traders are the focus is this morning and they have been extremely volatile with a very bearish bias this morning. As I write the S&P 500 is down another 2.94% % at 2680, the Dow Jones Industrial Average is off 3.74% at 24,644, and the Nasdaq is off 2.2%. It was a similar story in Europe where the FTSE dropped 1.5%, the DAX dipped 0.76% and the CAC lost 1.48%.
Here at home after the awful 95 point fall yesterday the S&P/ASX 200 looks set for another tough day with the SPI 200 now trading down 95 points at 5866.
Back to forex markets the US dollar has continued to recover against the commodity currencies and is gaining ground against the euro (1.2410) and the pound (1.3988). USD/JPY though is down a little at 109.47 on the back of the risk off tone that this equity market funk brings to markets more broadly. Back to the commodity bloc and if things kick off they won’t do well. The Aussie is at 0.7892 which is toward the bottom of the past 24 hours range – it's trying to hold before a huge day of data and events.
As things get funky bonds have reacted by easing the selling a little. US 2's are at 2.07%, the 10's at 2.75% and the curve is thus at 68 points.
Looking at the day ahead we have the release of December retail sales and trade for Australia and then the RBA board meeting decision announcement and governor’s statement this afternoon. Globally it’s a little quiet with Canadian and US trade this evening
Here's What I Picked Up (with a little more detail and a few charts)
International
- Stocks are off again and as the VIX rises into the 23’s it’s worth discussing how bad things could get. I mentioned in yesterday’s note that this had a 1994 bond market selloff feel about it. By that I mean folks saying “she’ll be right”, don’t worry, it’s the correction we had to have and those kind of comments. Yes, and NO. We don’t need to listen to the pundits – me included – we need to see what the retail investors who have such a part of this latest surge in stocks do. And we also need to think about what folks who have piled into passive ETF’s and index funds will do. Any sign’s they are panicking out and this 3,4,5% drop can easily morph into something more pernicious. We’ll see.
- Looking at the S&P price action in CFD terms its now trading at 2685 which is down and through the level I said in my daily videos last week it was likely to fall to. That’s not to crow that just means the easy move is done. It’s just Fibo levels folks. Straight forward garden variety 38.2% retracement is 2,700. Below that its 2,647 as the 50% level and then 2630 as the bottom of the trend channel the S&P moved back into recently. A break of that would be important. Here’s the chart. EDIT – Since I wrote that the S&P 500 collapsed to the levels highlighted and found support at the trendline. You can see that in the new updated chart as at 7.30am.
- It’s all about price moves this morning, but I still want to just put in a quick paragraph about the services PMI’s from around the globe yesterday. They remain pretty solid and speak to the reality that the global economy is doing well right now.
- The push back continued against US dollar weakness overnight as Mario Draghi hit out at forex “volatility”. That’s central bank speak for ‘we don’t want or like the current levels of the EUR/USD exchange rate’. Of course he can’t say that specifically because he’d be accused of trying to manipulate the euro. But that is exactly what he’s doing in sending the message to forex markets when he said of the 2% inflation target that,” new headwinds have arisen from the recent volatility in the exchange rate, whose implications for the medium-term outlook for price stability require close monitoring”. Reuters reports the written text of his speech to the European parliament did not include the word “close” before monitoring. Trader were kind of listening with both euro and the 2year forward 2 year rate pulling back a little. There is much room for a further consolidation however.
- Governor Kuroda was at it as well yesterday, saying that Japan needs to maintain ultra-easy monetary settings in order to try to get inflation back toward 2%. He was clearly wearing two hats, as was Mario Draghi, in saying that progress toward the goal is being made (that’s for retail consumption) but reinforcing that even with the economic recovery the BoJ – as it did earlier this week – will continue to keep rates low. His target of course is USD/JPY which he clearly wants to keep from slipping out of the bottom of the past year or more’s range.
- Keep an eye on the volatile Brexit relations. Last night EU chief negotiator Barnier effecetively said the UK can’t have its cake and eat it too. He noted “without a customs union and outside the single market, barriers to trade and goods and services are unavoidable”. Indeed. And on a related note S&P said a disorderly Brexit would put downward pressure on the UK’s credit rating.
- The risk off tone is hitting (Bitcoin) almost as hard as global regulator and bank scrutiny. The latest dent to the cryptospace has been banks saying they are shutting down the ability of clients to buy Bitcoin with their cards. That’s now dropped the price of BTCUSD back to the next Fibo support levels. Increasingly this is looking like a falling knife no one wants to catch. And why would you right now? It’s not obvious what a circuit breaker to this weakness will be, or might emerge from. This could end up a full round trip back into the $1850/$2966 region.
Australia
- Not pretty. That’s the price action yesterday on the ASX 200 physical and it’s the price action of the SPI overnight which has broken down and through the bottom of range that has held the SPI since November at 5,922. At 5906 this morning (5.45am) the SPI has lost another 55 points on top of the ASX200’s 95 point loss yesterday. To say that the local market is a shot duck is evident in the price action, to say that its performance is being driven offshore is equally correct. And that means we’ll see a turn around here when we see a turn around in the US and global stock markets.
- But part of the local weakness could also be fed by an, unfortunately timed research report that the AFR carries today headlined “Australian banks pose (a) global systemic threat”. You can read the full report at the site but the gist of it is “high house prices, a build-up of household debt post-GFC, and – for Canada, Sweden and Australia – banking sectors that are more than 20 percent of local market cap and 13 percent of 'global banks', make these markets likely sources of financial market instability in the year ahead”. Of course it’s more of the usual hand-wringing and Chicken Littling we’ve heard often before. But when markets are in a funk these kind of things often get more traction.
- Also in the AFR today is an article citing former Godman Sachs Australia chief economist Tim Toohey saying get ready for RBA rate rises in Australia this year. You can read it here, it’s the usual argument. And it has the usual caveat about inflation and wages at the end as a get out of jail free card. I just want to be clear about something. THERE IS NO WAY THE RBA WOULD BE LEAVING RATES WHERE THEY ARE NOW IF INFLATION WAS HIGHER. How could they forecast economic growth at the economy’s potential with rising inflation and do that? They couldn’t and they wouldn’t. So yes, Australia is in a position where the chances of an RBA rate hike are very high – as soon as inflation and wages rise. Second thoughts, you don’t need to read the article at all.
- Now, taking a deep breath, back to the SPI. We are now looking at a high chance that the SPI, and thus the ASX 200, is heading toward the bottom of the arrow on yesterday’s chart. That’s the 50 point zone which holds both the 200-day moving average (5823) and the top of the old range (5775). Currently (5.58am) the SPI is mounting a comeback – or trying to. And by the US close if the PPP buy the market back it could be back above 5,922. But it’s looking wobbly right now. EDIT – Since I wrote that around 6am the SPI collapsed and is now coming back. But the price action reinforces that this is the zone of support for the market. Other traders are clearly watching the same levels I am.
- The Australian dollar’s recovery from yesterday’s lows which took it all the way back up to 7953 is fading this morning. That’s normal in a risk off environment and with stocks still sliding in the US and across the globe. Gold and the yen haven’t exactly caught a bid yet so we aren’t seeing the usual maelstrom of capital flows and market moves that would be associated with an out and out fear trade. But the risks are rising if a weak US close morphs into a weak Asian and European session and then feeds back into the US. Yesterday’s low was just 10 points below the 38.2% retracement of the rally from 75 cents to 0.8135. And technically if 0.7885 gets taken out then its 0.7850 and ultimately the level I’m looking at now is 0.7750.
- Of course the trade, retail sales, and the RBA are today’s big trigger points for Australian dollar traders. There is very little chance of a change in rates and governor Lowe is likely to exhibit caution given wages and inflation. How the governor frames what’s likely to be an upbeat take on domestic and global growth with wages and inflation levels is going to be key to the impact on rate expectations and thus the Aussie dollar. Before that though the data is likely to buffet the market. Retail sales in Decmber are expected to dip 0.2% after November’s iPhone induced surge of 1.2% while trade is forecast to deliver a $250 million surplus after last month’s surprise deficit.
Forex
- The euro is down another quarter percent since I started writing this note. USD/JPY is moving lower as well and the Aussie is coming under pressure and has slipped below 79 cents just now. There is not a lot to add to what I have written above. But it is fair to say the US dollar recovery is not yet complete.
- Of course we can rule out yen weakness as a natural safe haven during times of market dislocation butu on balance the pushback we’ve seen form central bankers around the globe to the comments from Steven Mnuchin a couple of week’s back and then the strength of US wages and jobs growth has changed the narrative and refocused traders on policy divergence between the Fed and other central banks. That could mean that interest rate differentials return to a point of prominence in forex trading and forex markets rather than just the outright focus on growth.
- For more on my thoughts on the USD and the Euro I published a piece yesterday which you can read here.
Commodities
- Gold has caught a bid. I was short gold over the weekend but given the outlook for stocks I cut that position as soon as MT4 opened yesterday morning. At $1338 it still hasn’t really reacted in a manner that it could, or in some ways should given the carnage on stock markets. That reflects the US dollar element of the gold price which is holding it down. $1350 seems like a reasonable level it could climb back to even though momentum has certainly stalled.
- Oil markets are lower this morning but look like they could break wide open anytime soon. Brent fell to the 38.2% retracement level of the recent rally overnight and has stopped falling. But if I look at a weekly chart it looks like that target I have of $61.50 is a real chance as the charts roll over. Here’s the weekly:
Have a great day's trading.