The fear index VIX rallies 10%, gold and bitcoin sell-off. What’s happening? The answer is related to yields and central bank action as so often nowadays the market moves are. We have several central banks publishing their views and policies over the coming days and the bond markets have taken the view that the Fed tapering is coming sooner or later. This is why bonds are sold and the yields are moving higher taking the USD along for the ride. In this report, we will take a look at EURUSD, USDCAD, GOLD, BITCOIN and VIX. We will also provide you with the best stock movers on our watchlist. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
USD strength continues today as the 10 yr. Yield keeps on ticking higher. Therefore the strongest currency today is the greenback (+0.42%) while the traders are selling CAD (-0.83%) ahead of the BOC meeting later on today. The next weakest currency is AUD (-0.69%). The yield for the benchmark US 10-year Treasury bonds moving higher over the past few days has been supporting the USD. Yield: 1.38% vs. 1.33 prior close.
All the precious metals and USOIL traded lower yesterday. Platinum (-1.49%) was the weakest while USOIL (-0.19%) has been showing relative strength.
The S&P 500 (-0.34%), the DJIA (-0.76%) and the Nasdaq (0.07%) traded with mixed results yesterday. VIX rallying 10% and USD moving strongly higher with yields explain why there was a lack of risk appetite. Eight out of 11 S&P 500 sectors closed lower with industrials (-1.73%) leading the losses. The strongest sector was consumer discretionary (0.29%). Stocks performing the best on our watchlist were JD, WYNN, EXPE, NTES and LVS while BMRN, MMM, ITW, HPQ and DE lost the most ground.
The above chart shows the % performance of each stock. Stocks are presented here with the S&P 500 tracking ETF (SPY, red line) to illustrate the performance of each stock relative to the benchmark index. This allows our readers to see the potential for intraday trading opportunities in these stocks. Often the sudden increase in volatility continues on the second day. You should, therefore, keep monitoring these stocks to see if they will satisfy your criteria for a trade. All % performance charts in this report are courtesy of Tradingview.com.
The BOC Rate Statement is the biggest risk event today. For details on other important macroeconomic releases, see the TIOmarkets economic calendar here.
It’s been our view that EURUSD is weak and could move lower. Yesterday’s market reaction to the RBA taper decision was the trigger that was needed to send the USD higher and the dollar counterparts down. The ZEW disappointments from the Euro area and Germany helped to soften the bids and EURUSD sold off. But as always with the markets, the question is what’s next? Currently, the market is in a downtrend in lower timeframe charts with the next important support at 1.1804. This is where several technical factors coincide (the 50-day SMA, a previous resistance level, and a channel high).
The next big event is the ECB Monetary Policy Statement and press conference on Thrusday. There are some hawkish expectations for the ECB but as usual, we always believe the only consensus opinion that matters: the price action after the fact. As liquidity isn’t an issue for us we have the privilege of being reactive (rather than proactive) and trading what we see, not what we anticipate. The key price zones and levels for EURUSD are 1.1663, 1.1804, 1.1892 – 1.1908 (38.2% retracement level and a weekly resistance level) and 1.1965 – 1.1975 (the 50% retracement level and a daily swing point).
There are no policy changes expected from the BOC in today’s meeting. Analyst consensus believes that the central bank might taper its QE program in the next meeting (in October) but the big guns (rate hikes) are likely to be applied only in Q4 2022. Therefore, the moves in the moves in USDCAD are likely to be impacted by the Fed and oil price. The key price levels in USDCAD are 1.2422, 1.2493, 1.2655, 1.2707 and 1.2948.
Last week gold was trading in a tight range and we warned of the coming volatility breakout (here). This is indeed what happened and XAUUSD rallied to the 1833.92 resistance (one of the key levels identified in the report). Yesterday’s sell-off as the dollar rallied was a continuation of the volatility burst we were expecting to see. This sell-off (-1.62%) created a bearish candle with a close well below the previous candle lows. This could lead to further weakness or the next rally being sold before the 1833.92 resistance in XAUUSD can be penetrated. The trigger for the decline was the dollar strength seen after the US 10yr yield has been moving higher. The benchmark T-bond yield climbed to 1.38 yesterday (previous close: 1.33) The next key support for gold is at 1774.47.
Another market hit hard by the rising yields was bitcoin which closed down by 11% but was down 18.67% intraday before recovering. We pointed out (here) the increased downside risks in bitcoin. Yesterday’s price decline was stopped by a level we identified in the report (the proximity of the 38.2% retracement level, 42123). If this level fails the next key price level is near to the 61.8% Fibonacci retracement (37340).
The market rallied higher after our report but the sharply rising 10 yr yield was evidently too much and the market sold off. In the past Bitcoin has suffered from periods of the rising value of the dollar. It doesn’t have a yield and when institutional investors see a better yielding opportunity coming up they tend to go after it. No wonder Bitcoin is called ‘new gold’. It’s subject to the same vulnerabilities as the yellow metal. The rising yields and the USD strength suggest the markets believe the Fed will be the first to taper which isn’t (for the reasons just mentioned) good news for Bitcoin.
Another interesting market that rallied yesterday was VIX (+10.5%). To simplify this index measures the eagerness to buy insurance cover for long equity positions. A rally in VIX is obviously a negative signal for those holding stocks and might incite both profit-taking and initiation of short positions in equities and equity indices. It’s highly interesting to see VIX jumping higher on the same day that we see gold, bitcoin, EURUSD and oil selling off. VIX is definitely an index worth over the coming days.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||Fed Chair Powell said on Friday (August 27th) in Jackson Hole Symposium that tapering could begin in 2021 but also voiced concerns about the spread of delta variant.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus since the beginning of the pandemic. Now, US lawmakers have agreed to a $1.2 trillion infrastructure spending plan. The Fed officials consider ending the asset purchases in the middle of 2022.|
|Yields||Apart from the recent pickup (that started in August 2021), the Treasury yields have been moving lower since March 2021. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||After two highly positive employment reports (+938K and +943K) the August number (+235K) was a big disappointment but in fact at a level that used to be the norm in the years before the pandemic. This number could delay the Fed taper but isn’t likely to reverse their decision to taper.|
|Inflation||The month on month Core CPI (excluding food and energy) for July came in at 0.3% (0.4% expected) which indicated a big drop in the rate of inflation from the month before (0.9%). The Fed has earlier taken a view that inflation is transitory and will be therefore likely to fade away. Even though one data point doesn’t make a trend it seems that the Fed has been correct in their inflation projections. The lumber futures for instance are once again trading at October 2020 levels and down over 70% from their May highs.|
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Market News & Facts
- No chance expected from BOC today
- Japan GDP for Q2 +0.5% (+0.3% prelim.)
- Federal Reserve Beige Book to be released today
- RBA kept rates at 0.10% and cut but extended QE
- Australian consumer confidence 100 (101.8 prior)
- German factory orders +3.4% (-1.0% expected)
- Saudi Arabia cuts oil prices for Asia
- New Zealand ANZ Commodity Price index -1.6% (-1.4% prior)
- Mercedes: chip shortage to stay in 2022
- China Services PMI 46.7 (52.6 expected)
- Gazprom to switch all settlements from USD to CNY
- US Factory Orders 0.4% (0.3% expected)
- WHO: Variant Mu could be resistant to coronavirus vaccines
- Australia July trade balance 12.1 bn AUD surplus (10.2bn expected)
- OPEC in agreement on increasing output gradually
- US ISM Manufacturing Index 59.9 (58.6 expected)
Quick Links to Recent Analysis
The Next Main Risk Events
- CAD – BOC Rate Statement
- CAD – Ivey PMI
- USD – JOLTS Job Openings
- GBP – Monetary Policy Report Hearings
- USD – Speech by FOMC Member Williams
- USD – Federal Reserve Beige Book
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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