Lower, higher, lower but always in the red. That was the story of stocks in the US overnight after a very poor lead in from Chinese, Asian and European stocks. US bond yields soared and then floated back with the 10 year closing at 2.54%.
On FX markets the US dollar was under a bit of pressure after some early strength and the Aussie recovered from materially weakness and a new low for the year yesterday afternoon.
Before I get into the actual market action though I want to comment on the Fed given we have 7 speeches this week.
Fed thumbs its nose at the market
No I don’t mean they have stopped bond buying or raised rates but they have certainly come out in a very aggressive manner overnight to defend what they are doing and why. Now we saw from the Bank of International Settlements yesterday that they are saying the Globe’s central banks have done about as much as they can and that it was causing imbalances and a misallocation of capital which is the theory I posited a month ago in our Saturday Weekly Newsletter when I wrote that I thought the Fed would taper because it recognised the bubblicious nature of the stock market both as a result of its policies and those of the Bank of Japan.
I believe that this is at the heart of the Taper, probably more so than the economic recovery, so it is not unexpected that even though the Fed is being very transparent in what it wants to do, which is really take air out of stocks without popping them, the risks are that markets over react.
Overnight combative Dallas Fed President Richard Fisheer didn’t miss when he told the Financial Times,
Markets tend to test things…We haven’t forgotten what happened to the Bank of England [on Black Wednesday]. I don’t think anyone can break the Fed?…?But I do believe that big money does organize itself somewhat like feral hogs. If they detect a weakness or a bad scent, they’ll go after it.
There you go he says it later but the Fed recognises that there is going to be some blow back from what they are doing and it seems they are ready for it. Indeed this was a message that non-voter this year Narayana Kocherlakota from the Minneapolis Fed said he wasn’t overly worried about the markets reaction,
I think what we’ve seen so far is not a cause for concern but obviously if these higher yields were to harden over a longer period of time that would be restrictive to economic conditions, suppressing demand and thereby suppressing employment
What interesting times we live in – grab the popcorn and stay close to the screen.
Stocks are breaking lower, S&P is gonski
Rightyo, as you know its not all about the Fed it is about a global central bank compact that seems to have emerged which says that stock and property market bubbles are not the way to get a sustainable cure to the economic woes of the Globe (RBA and Australia’s FIRE industry spruikers take note). Indeed the Chinese decision to tighten and tighten aggressively yet signal that there is ample liquidity as they did yesterday implying the foot stays on the throat of Shadow Bankers and Property spruikers hit the Shanghai Composite hard as it closed down 5.31%.
The rest of Asia was down in the 1-2% range which put pressure on European stocks which were down across the board. The FTSE fell 1.43%, the DAX fell 1.25%, the CAC dropped 1.70%. In Milan stocks were only down 0.94% while in Spain stocks fell 1.91%.
So from the open US stocks were under pressure and the the Dow traded down to a low of 14551 before rallying back toward the previous weeks close but ultimately closing at 14660 down 139 points or 0.94%, the Nasdaq fell 1.08% and the S&P mapped a similar path to the Dow with the physical closing down 1.22% at 1573.
Looking at the futures version of the S&P though as highlighted in my VantageFX MT4 chart below you can see that the trend line from the lows of last year is well and truly broken and lower levels beckon.
Based on my usual process and over many weeks the outlook is now for a move back into the 1500/10 region, then 1470/80 which is big support and then ultimately a target might be 1330/60 the bottom of which if it breaks opens up a move below 1000.
Over in FX Land the Aussie got smashed and then recovered and the USD lost ground
I’m struggling a bit to understand why the USD lost ground last night after early strength not only against the Euro, Yen, Aussie and the Pound but across the Board. Seems it must have been the equity sell off which is somewhat counterintuitive because IFO in Germany was as expected, the Chicago Fed NAtional Activity index was, at –.3 slightly better than last months -0.52 and the Dallas Fed index jumped from -10.5 to +6. So I can’t see why the US might have come under pressure. But it did so I won’t argue with it, as Stevie G used to say “It is what it is”.
Anyway Euro made a low of 1.3058 before rallying to 1.3144 and it sits at 1.3124 this morning, still looking wobbly on the dailies I reckon though. The Pound had a big range as well trading 1.5342 – 1.5465 and it sits at 1.5438 this morning also looking vulnerable on a multi-day time frame. The Yen also lost ground and then recovered trading 97.21 – 98.70 and then back to 97.67 where it now sits. USDJPY needs to take out yesterday’s highs again soon or it is at risk of a very big reversal lower – as counterintuitive as that is.
For the Aussie it was a tumultuous day. On Saturday morning early doors the Aussie was closing in New York in the 0.9230 region before being sold down to a close at 16 and an open yesterday morning just below 0.92. It then traded up to the top of a 4 hour box in the 40’s where it met resistance and then as the US dollar was strengthening across the Board the Aussie got absolutely smashed back to a low of 0.9145 just 1 point above my stop loss on yesterday’s long.
As I went to bed I thought if it was going to recover it would get to about 0.9302 so I placed a take profit at 0.9289 which was triggered on the run to the high of 0.9299 and it has now slipped back below 0.9250. The 4 hours still suggest a bit of a rally and 0.9302 remains key topside resistance with support 100 points lower.
Economic commodities do not like what the Central Banks are up to
Dr Copper was down again overnight falling 2.28% as the Chinese and Fed actions, no doubt along with the words of the BIS reverberated around investors heads. Gold was off 1.15% to $1282 OZ and Silver fell 2.33%. Crude danced to its own tune as usual up 1.59% while corn and wheat were both down but soybeans rallied.
Business Climate in France, Retail sales in Italy, Spanish Bond Auction and then Durable Goods in the US and Housing Prices as per Case Shiller and New Home Slaes and the Richmond Fed index.
But of course we’ll all be watching the Shanghai stock market