The Evergrande debt crisis keeps on playing into markets. Yesterday, there was a surprise move lower in the USD that was caused by the Chinese government intervention. The risk-on mood was triggered by Beijing giving a cash injection to the Chinese financial system just before the $83.5 million interest payment by Evergrande. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The intervention by the Chinese government eased concerns over system-wide risks being realised in China’s property market and the financial system. The biggest fears of potential contagion to the global financial markets were soothed. This resulted in US Treasury yields moving substantially higher. This morning NZD, AUD and GBP are leading the rally against the USD. JPY has been the weakest currency since the London open yesterday. The benchmark US 10-year Treasuries yielded 1.41% at the end of the trading yesterday. Previous close: 1.32%. All % performance charts in this report are courtesy of Tradingview.com.
USOIL keeps on rallying as we suggested it should. Our expectation that gold and other precious currencies should be weak have also turned to be correct. They’ve been pressured as the Fed is looking to decrease their balance sheet. All % performance charts in this report are courtesy of Tradingview.com.
The S&P 500 (1.21%), the DJIA (1.48%) and the Nasdaq (1.04%) all rallied strongly yesterday. The energy sector (3.5%) was again the market leader with the financials (2.45%) recovering strongly on the news that the Beijing government intervened stabilizing the Chinese financial system. The utilities (-0.53%) and the real estate (-0.49%) serctors lost some ground. The biggest winners on our watchlist yesterday were BB, DVN, SLB, CRM and HAL. The biggest downside movers were WPM, CHTR, D, YUM and LOW.
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.
Today’s biggest risk events are the German IFO Business Climate and a speech by Fed Chair Powell. For details on other important macroeconomic releases, see the TIOmarkets economic calendar here.
Market update: USOIL moved higher as expected (here). The market has now reached the resistance levels we anticipated and has lost some momentum but doesn’t yet look like it’d be reversing. A break below 72.87 would be likely to bring the market to the SMA(20) around 71.70. The key price levels for USOIL are 66.90, 69.34, 72.87, 73.88 and 76.38. A break below 69.34 would negate bullish indications in this market.
USDCHF has been a good market to us lately (see here). Now the pair has returned to levels where we suggested (here) the buyers might get interested in this market again. USDCHF retraced to 0.9242 and penetrated level by 0.28% but now it seems that there is some buying interest developing in this market. Both SMAs (50 and 20) are pointing higher and the Stochastics are again bullish. These indications suggest higher prices. A break below yesterday’s low (0.9250) wouldn’t be extremely bearish but it would probably trigger stops and send the pair down to the rising trendline support at 0.9180. A break below this trendline would be bearish though and indicate a move to 0.9150 would be in the cards.
After rallying and breaking out of the bear channel EURCHF has now retraced to a level where the 50% retracement level and the SMA(50) coincided. As a result, the Stochastics are about to give a buy signal near the oversold territory. The next key resistance level is at 1.0937. The bullish indications are negated if the market breaks below yesterday’s low at 1.0806. The other key price levels for this market are 1.0695 and 1.0986.
We noted yesterday (here) how the US equity indices rallied even though the FOMC indicated they might start tapering soon and pointed out that this indicates strength. This indeed was the case. Yesterday was a bullish day across the board (SPX, DJIA and NDX). Now S&P 500 has returned to the rising trendline that used to support the market. Therefore, price action at these levels is quite critical. If the market sells off strongly from here, then the probabilities for the market breaking the recent swing low (at 4305) increase. A successful break above 4485l however would signal strength and the market would be likely to test the 4550 high once again.
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 the delta variant. Now the Fed signals (September 22nd) that taper could start soon but hints that negative developments in the employment front could cause a further delay.|
|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 August was confirmed at 0.1% (0.3% expected) while the headline inflation (y/y) came in line with expectations (5.3%, 5.3% expected, 5.4% prior). The core CPI increased 4.0% on a year-on-year basis after advancing 4.3% in July. Fed’s view that inflation is transitory seems correct.|
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The Next Main Risk Events
- EUR – German IFO Business Climate
- USD – Fed Chair Powell’s Speech
For more information and details see the TIOmarkets economic calendar here.
Market News & Facts
- Chinese government injects cash into financial markets
- BOE hints at tightening the momentary policy
- Twitter allows the use of cryptos
- US initial Jobless Claims 351K (320K expected)
- FOMC: tapering could start soon
- Fed keeps the rates unchanged
- BOJ keeps its monetary policy unchanged
- API shows a drop in US crude stockpiles
- S&P ratings expect Evergrande to default
- Trudeau to win the Canadian elections
- RBA not looking to raise rates before 2024
- UoM consumer sentiment 71.0 (72.2 expected)
- New Zealand manufacturing PMI 40.1 (62 prior)
- Democrats looking to repeal Trump’s tax cuts
- China to release zinc, aluminium and copper from its reserves
- New Zealand GDP 2.8% (1.4% expected)
- Australian employment change -146.3k (-90k expected)
- UK August CPI 3.2% (2.9% y/y expected)
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