Okay I’ve probably been boring people with my take on market instability lately but last night was just another snowflake on the mountain. No avalanche yet but things aren’t looking great in global stocks even if they aren’t exactly crashing.
It’s Europe which is providing the bulk of the warning signs and the direct impact on you – my readers here of this note – is that it reinforces the need for vigilance when it comes to position sizing and stops. I believe that volatility transitions because because traders and investors get lulled into a sense of security by low volatility which leads to bigger positions being taken in order to make the same amount of cash in a low range market.
So when I see that the DAX is plunging back toward 9,000 after trading above 10,000 in the past month, as Italian bond rates continue to rise and as it becomes clear – or appears to becoming clear – that a risk rotation is happening and markets are becoming more unstable.
To reiterate this has been my hobby horse for some time now but I strongly believe as a follower of both Minsky and Mandlebrot that volatility transitions and when it does it becomes sticky – which means options are cheap by my reckoning.
Anyway looking at overnight trade we see that the Dow closed down 75 points to 16,368 for a loss of 0.46%. The Nasdaq fell the same percentage amount to 4,335 while the S&P 500 dipped 10 points or 0.53% to 1,910.
We are close to a big break lower in the S&P – it hasn’t happened yet but its close. Watch the weeks close.
As highlighted in my intro it was another really poor day in Europe. The ECB’s intransigence in the face of economic weakness is bothering traders especially now that the Russian trade sanctions may actually further subdue growth and particularly confidence.
At the close the FTSE fell 0.59% to 6,597 but on the continent losses were larger with the DAX down 1% to 9,039, the CAC fell 1.36% while the peripheral markets in Milan and Madrid were smoked down 1.94% and 1.63% respectively.
The chart of the DAX speaks for itself.
The impact locally is that the bias on the open for the ASX is down with the September SPI 200 contract off 23 points in overnight futures trade to 5425.
In Asia yesterday the Nikkei was up 0.48% but a USDJPY back at 102 should fix that today while in Shanghai the reversal off the 12 month high gained pace falling 1.33%. this will suggest to traders that the high for this run is in. In Hong Kong stocks fell 0.8%.
You just can’t ignore the moves in bonds either with US Treasuries rallying 6 points to 2.41% as the growing instability pushes cash toward a safe haven. German 10 year Bunds echo this sentiment rallying 4 points to an incredible 1.06% with UK 10 year Gilts rallying a similar amount to 2.49%.
On currency markets the Euro fell but only marginally all things considered to 1.3362. Sterling dipped to 1.6834 and the Yen is benefiting from what appears to be safe haven flows and is at 102.05 this morning. The Aussie dollar was hammered after the shock jump in unemployment yesterday but at 0.9270 it hasn’t fallen as much as it might showing the positive effect of the huge interest rate differential in its favour.
On commodities markets Nymex crude staged a bit of a rally up 66 cents Bbl to $97.58. Gold rose slightly to $1,313 while silver is at $19.97 oz. Copper was fairly steady at $3.17 oz. on the Ags wheat and corn fell heavily down 1.16% while Soy beans fell 0.63%.
Iron ore for September delivery fell 55 cents to $95.00 tonne while Newcastle coal managed a rally up 30 cents to $71.15 tonne.
Data today in Australia is dominated by the release of the RBA’s Statement on Monetary Policy at 9.30 but we also get home loans data. Chinese trade is going to be very important today as is German and UK trade tonight. In the US unit labour cost and non-farm productivity will be more important than usual in the current environment.