A rebound in risk trades and raw materials underpinned commodity currencies Tuesday, we evaluate whether or not it will last. The New Zealand dollar was the top performer and continued to rise early in Asia-Pacific trading on Wheeler comments while the euro lagged. Japanese retail sales are up next.
It was Turnaround Tuesday in most markets. Beaten down assets like stocks and commodities rebounded in a squeeze higher. After weeks of non-stop selling, oil bounced nearly $2 from the mid-April lows and that sent USD/CAD down to 1.2915 from 1.3015 in US trading.
These types of rapid squeezes are typical corrections in trending markets. The catalysts at the moment were position squaring ahead of the FOMC and month end. The generally last 1-3 days and are often opportunities to re-establish positions at better levels.
The kiwi rallied in early Asian trading, hitting 0.6739 from as low as 0.6595 the day before. RBNZ Gov Wheeler reiterated comments from last week's rate cut statement. That indicated he wasn't overly concerned about the post-statement bounce in the kiwi. He didn't introduce any harsher jawboning and that sent NZD/USD a half-cent higher.
Expectations for the Fed are modest with most market watchers expecting no strong hints and a continued ode to data dependency. One data point that may have given the Fed pause Tuesday was consumer confidence at 90.9 compared to 100.0 expected. It was one of the biggest misses on record and took the index to one-year lows.
Before the Fed the Bank of Japan is in focus with retail sales for June due at 2350 GMT. The consensus call is for a 0.9% m/m decline. It comes on the heels of a 1.7% surge the month before but it's still unwelcome news for the BOJ as they weigh whether to stimulate further.
|Retail Trade s.a (JUN) (m/m)|
|1.7%||Jul 28 23:50|
|Retail Trade (JUN) (y/y)|
|0.5%||3.0%||Jul 28 23:50|
|CB Consumer Confidence (JUL)|
|90.9||100.0||99.8||Jul 28 14:00|
The Shanghai Composite index stabilized overnight at its 200-day MA for the 3rd time in over 20 days and S&P500 closed right above its 200-DMA on Monday. The usually inversely related EURUSD broke its June trendline resistance, regaining its 100-DMA but failed to climb above its 55-DMA. Buy-the-dip complacency in equities may suggest the S&P500 will bounce off the key 200-DMA as it has done on July 7, 8, 9 and 10.
Moving into the weekly horizon, however, the divergence between the Dow Jones Industrials Average and the S&P500 becomes interesting, with the former breaking below its 55-WMA for the 1st time since the infamous week of mid October 2014, when the Fed officially ended QE3. And so in order for S&P500 to reach its 55-WMA, it would have to lose another 20-pts or 0.98% from Monday's close.
Few Differences between now & OctoberWe have seen all of this before during the escalating volatility of October 2014, all of which emerged from a rising US dollar as the Fed announced the end of QE3. Bond yields sustained a violent plunge alongside falling equities, which dropped nearly 9% from their prior peak.
Yet, the vital dinstinctions between today and October are: i) the stock market carnage in China; i) the protracted collapse in commodities; iii) the return of deflationary concerns; as well as iv) their implication for capex.
All we worried about back October was a slowing Eurozone and a winter-bound US economy. The Bank of Japan helped save the day by stepping up QE and the ECB did the same by signalling QE later in November.
With FOMC forecasts currently signalling TWO rate hikes in 2015, will this save the day?
US core durable goods orders were solid on Monday but failed to boost the US dollar because the shipments components were weak and that's likely to hurt GDP later in the week. The euro was the top performer as it rose above 1.11 while the Australian dollar lagged on China worries. We take a closer look at the rout in Chinese stocks and try to put it into perspective. Our EURAUD Premium long @ 1.4690 from June 17 is currently netting +520 pips. EURUSD and USDCAD are also in progress.
1) “The worst selloff in 8 years”
The 8.5% fall on Monday is technically the worst fall since the crisis but it only marginally exceeds some other recent declines and is well short of some of the 10% intraday moves in recent months. It's a big fall but the game hasn't changed.
2) The signal from base metals is more worrisome
The Bloomberg base metals index is down 6% since May and at the lowest since 2009. This, much moreso than Chinese stocks sliding, is a reason to worry about the Australian dollar. Iron ore prices remain above the July lows but they're in danger.
3) The Shanghai Composite is up 79% in the past year
Lost in all the talk of a 28% fall from the June high is a reminder that since July 27, 2014, the index is up 79%. That kind of performance and the 15% ytd gain would be the envy of the world if not for the associated volatility.
4) Chinese policymakers reiterated a desire to help
The most noteworthy news in US trading was a denial from China Securities Finance that it was leaving the market. Officials reiterated that they will continue to act as a market stabilizer and will increase buying. That could help calm markets today.
5) Distrust Everywhere
We don't think it's now but one day there will be a true rout in China and this episode offers important lessons. One is that Chinese opacity constantly leaves the market in doubt and on edge. There is a report that China has spent as much as 550 billion pounds in stock buying. A survey of emerging market money managers shows most believing Chinese growth is in the 5-6% range, not 7%. There is a deep distrust of China that can turn a blip into a panic at any time.
|Durable Goods Orders (JUN)|
|3.4%||3.2%||-2.1%||Jul 27 12:30|
|Durables Ex Transportation (JUN)|
|0.8%||0.5%||-0.1%||Jul 27 12:30|
This Sunday didn't start with gold speculators selling over 55 tonne in less than 2 minutes as was the case 7 days ago. But the effect of last week's gold collapse has been revealed in the latest report of speculators' commitments from the Comex, showing net longs plunging 41% to 28,279 contracts, the biggest percentage decline since November 2013.
Will this week's combination of a hawkish FOMC, an upward revision in US Q1 GDP and a better than expected US Q2 GDP release, emerge as the worst combo outcome for gold? A $1,030 print is next on the cards, followed by $920.
The difference between a hawkish Fed FOMC statement and an actual rate hike could be a about $200 bn in cancelled energy projects and over $25 bn in potentially distressed energy-related bonds.
After last week's Greece-driven rally in global bourses, selling has taken over anew. You can place the blame on forward-looking concerns about Apple, Yahoo! or, resurfacing deflation fears from plunging oil and other commodities. Placing the blame on the Fed never fails—this time highlighted by worries that next week's FOMC statement could signal a September rate hike in an environment of eroding profit margins, receding earnings growth and more uncertainty from China. We still haven't changed our view about expecting the Fed to keep rates on hold this year as argued over the last 5 weeks in prior IMTs.
DJIA30Unable to match the S&P500's retest (not close) of a new all time, the DJIA retests its 200-DMA after a series of lower highs. It's time to switch the chart to the weekly, where the 55-WMA awaits the index near 17,570s. Next week's FOMC and the subsequent week's NFP will command the balance of power, but medium-term momentum indicators continue to suggest further consolidation into end of summer, with selling the bounce near 18,200s is as certain as buying the dip at 17,170s.
S&P500Monday's failure to touch and close at a new high, followed by three consecutive daily declines towards the 55-DMA is another confirmation of lacking conviction in this bull market. Today should likely see a retest of the 100-DMA at 2095, which will require the help of a VIX bounce above 14.00. Only a break below 2080 should get the bears excited about a potential revisit to the 55-WMA. As disinflationary pressures pick up and the Fed hawks show their muscle, equities world-wide have a reason to be nervous. Durable goods orders will become important again as oil/gas explorers and miners are forced into fresh capex cuts, now that the likes of Chesapeake energy and ConocoPhillips see their rating near default territory. And let's not forget that July was the 2nd best month on average for VIX performance over the last 10 years.
FTSE-100For an index where 27% of member companies are directly or indirectly tied to energy and miners, the exposure to the latest commodities slump can't be ignored. One way to assess the FTSE100 against oil is the FTSE/Brent ratio tackled here, where the index struggles to rally relative to oil beyond a key 122 resistance level. Already trading below its key moving averages, the FTSE100 is vulnerable to extending losses towards the 6,500 level as brent is bound to break below $53.00.
Tune in for further analysis on the DAX-30 and ShanghaiComposite in upcoming IMTs.