Look out below – Yen opening stronger as stocks go into a funk

October 13, 2014

USDJPY has opened up a little weaker this morning, below 107.50 for the first time in 3 weeks as markets around the world prepare for what could be an ugly week’s trade on stock markets.

USDJPY looks like it is headed to 105 low maybe lower – for that to happen it would suggest that stocks really go into a funk. And who would bet against it after another terrible night’s trade and a poor end to the week Friday.

Traders are clearly getting worried about the deterioration in sentiment on global stock markets. While some of the weakness has been laid at the feet of Microchip CEO Steve Sanghi’s warning of an “industry correction”, the weakness was across the board and across the globe. Indeed, it’s universal selling of stocks as European growth continues to deteriorate, the Fed warns of the impact of the US dollar on growth, investors worry about its impact on profitability, and there is a general mood of correction and taking cash from the table.

I continue to highlight the teaching of that great investment guru Kenny Rogers who taught us, you gotta know when to fold hold ‘em, fold ‘em, walk away and, as is increasingly becoming the case, RUN.

John Hussman picks up on a similar theme in his latest weekly missive.

So at the close, the Nasdaq was down 2.34% to 4,276 after that semiconductor warning. The Dow fell 115 points or 0.69% to 16,544 and the broader S&P dipped 1.15% or 22 points to 1,906. The charts are looking very ugly.

One more day selling and the S&P could hit one of Hussman’s ‘air pockets’.

In Europe, there was also a sea of red with the FTSE down 1.43% to 6,340 and the DAX at it lowest level in a year, closing down 216 points or 2.4% to 8,789. That’s a long way from recent highs above 10,000. The CAC dipped 1.63% to 4,074 while stocks in Milan and Madrid dipped 0.94% and 1.19% respectively.

The impact has been a terrible night’s trade on local futures markets with the December SPI 200 contract down 38 points to 5,119 just 25 points from the low of the year we saw in February. Iron ore staged an impressive rally however, so that might help at the margin, but not materially as the overall market struggles under the offshore weight.

In Asia on Friday, it was also an ugly day’s trade likely to be replicated again today. The Nikkei was off 1.15% to 15,301, the Hang Seng dropped 1.89% and the Shanghai B index dropped 0.6% to 2,375. While offshore markets will drive trade today in the region there is some very important data in China this week with the release of new loan, trade and inflation data vitally important to views on its economic health.

But the Nikkei is maybe telling us something about the Yen and bigger markets – one more day for confirmation.

On Bond markets, the rally continues with US 10-year Treasuries down 3 points to 2.28%, German Bunds at 0.84% and UK Gilts at 2.22%.

On Currency markets, the “risk off” feeling smacked the Aussie back to last week’s and this year’s lows. 0.8660 is the key level to watch but it would be unusual for the Aussie to hold if the stock sell off really gets going. The euro dipped back to 1.2623 but sterling is doing relatively well, although still down, at 1.6075. USDJPY is ready to break substantially lower and is at 107.63. It could move 2 to 3 big figures lower.

On Commodities, there was a huge rally in iron ore with December futures up $1.79 to $80 a tonne. Newcastle coal continues to be buffeted by the Chinese tariff however, dipping another 45 cents a tonne for the December contract to $65.30. Crude settled at $85.56 a barrel, gold is becalmed in the low $1,220s at $1,223 and copper likewise is at $3.03 a pound. On the Ags, wheat popped 1.54% higher, but corn and soybeans were lower, dropping 2.79% and 0.67% respectively.

On the data front today, we’re waiting for a speech from Mario Draghi and it is the Columbus Day holiday in the US. New Loan data in China is scheduled to be released, as is trade – but these are sometimes fluid with their dates. There is nothing in Australia or the US.

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