Stocks down, US dollar up as markets await a change in Fed stance

August 6, 2014

A very interesting night last night in markets with another day of volatility.

Think a spinning top when it starts to lose momentum and becomes unstable. That’s where markets are heading as the tractor beam of the Fed’s money drop gives way to a reality that we are but a couple of months from that ending and then perhaps only 6 months away from rates beginning their inexorable normalisation.

So as I have constantly highlighted over past months – not completely right yet though – i that from periods of stability instability grows.

Last night it seems the selling was combination of worries on growing tension on the Ukrainian border with Russia and the continuation of growing uncertainty as the end of QE comes close and traders focus on valuations in a different interest rate environment. Last night’s ISM non-manufacturing PMI was another sign the economy is healing.

Indeed Graeme Jarvis, Westpac’s Director of GCM Strategy said this morning that he felt last night’s price action was “confirmation” of his view that markets are at a tipping point I reported Friday at Business Insider.

At the close the Dow fell 140 points or 0.85% to 16,429. It had been down 200 points at one stage in the after noon before recovering. The Nasdaq was 0.7% lower at 4,353 and the S&P 500 fell 19 points or 0.98% to 1,920. It’s looking wobbly on a technical basis.

Weekly Uptrend not broken – YET

In Europe there will be catch-up this evening with the big markets of London, Frankfurt and Paris up 0.07%, 0.39% and 0.37% respectively. Giving credence to my enduring theme that we are seeing the asset allocation shift continue stocks in Milan fell 329 points or 1.62% while Madrid lost 142 points or 1.35%. At the same time 10 year bonds in both nations sold off 6 and 5 basis points respectively.

Last night’s Markit services PMI’s were that bad and in some cases like Spain and the UK were actually quite good. Add in EU retail slaes coming in double the 1.2% expected as a year on year rate and perhaps worries are the ECB will go another month without QE.

Locally on the ASX futures market the September SPI 200 contract is off 33 points to 5,440 suggesting another bad day on the physical after yesterday’s weakness.

5,409 the big level on the SPI 200

Asia will do it tough today after last nights price action. The Nikkei fell 1% yesterday to 15,320 while stocks in Shanghai were off a slight 0.15% to 2,220. There is not a lot of data out today in the region save for Japanese economic leading index so traders will have an eye on what the US did and what Europe will do.

On currency markets the US dollar was stronger against the Aussie dollar and the Euro. The Aussie is down 0.35% to 0.9303 with Euro down a similar amount at 1.3375. Sterling managed to rally a little to 1.6881 while USDJPY is still resting in the mid 102.5 region.

On commodity markets iron ore swaps for September closed at $95.92 tonne while September Newcastle coal leapt $1 tonne to $70.85 as the nascent recovery continues.

Nymex August crude fell 63 cents Bbl to $97.66 while gold sits at $1,287 and silver $20.17 while copper fell 4 cents to $3.20 lb. Wheat rallied 1.5% while corn fell 0.7% and soybeans fell 1%.

On the data front there is nothing out of note in Australia but German factory orders tonight will be interesting as will house prices and industrial production in the UK. Mortgage application and trade are out in the US.

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