Market Talk – August 21, 2015

Trading Community

The share markets collapsed and so far the May high looks to have been correct. The decline into this period is having the precise correlated response necessary to create the peak in government for this turn in the ECM – the final rush to quality. The S&P 500 cash previously elected just one Weekly Bearish at 2084 level, whereas the Dow had previously elected two Weekly Bearish. This reflects the contraction in international money and the shift to government paper by the big money. The NASDAQ Composite, which had made a new high in July compared to May for the S&P 500 and the Dow, did not elect any Weekly Bearish previously before today.

The closing on the Dow took out several Weekly Bearish levels, yet held the extreme technical support at the 16321 level (not system). Next week we have a technical pivot area at 16548. If we hold the low of today, then there can be a bounce to retest some of the overhead reversals that have been elected before pressing back down. Monday’s open will be critical.

We warned a year ago that the S&P 500 was taking the lead from the Dow. Then NASDAQ took the lead from the S&P 500. On the way down, the Dow leads for this is the big money running to the flight to quality.

All Asian equity markets started in the red and never really looked back. Japan closed down 3%, Shanghai down 4% and HSI managed to climb back to -1.6% but was one stage down 2.7%

Europe didn’t really stand a chance and all major indices spent the day in the red then closed lower by 3%. Asian futures late in the US session are China, Japan, and HSI who are all down an additional 2% from the Asian close.

The US bond market has been the main beneficiary – even a smidgen against bunds (1bp)! The US yield curve continued yesterday’s flattening theme but only out to 10’s (now trading 2.05%). Two’s and five’s were where the bulk of the buying emerged today (-2.5bp) as people just look for a safe-haven cove away from the equity storms. The longer end performed, but not enough to see the flattening continue. The Treasury market is set for its best week since March.

In Europe, it was a bit of a messy picture as peripherals lost ground against bunds. BTP’s (Italy), PGB (Portugal), GGB’s (Greece) all wider to bund by +6, +6 and +16bp respectively.

The TY/RX 10yr spread last seen this evening at +147bp (did see it trade at 144.5 at one stage intraday).

With most dealers now talking of global deflation, oil had a rather poor day. Last seen down 2.35% (Brent) at $45.50 firmly puts TWI on that psychological $40 target. Obviously, that does not help Russia and the rouble lost another 2.5% against the US$ today.
Not all doom though, as gold continues its bounce with the price last seen this evening at $1162 (up 0.50% on the day).

The DXY was last seen at 95.03 (-1%) on the day. The main strength is coming from the euro (+1.02%) and the JPY (+1.03%).

Overall, the general bearishness in the share markets is becoming extensive. So many people expect a meltdown and keep predicting a Great Depression out of the classic textbook. The string of Directional Changes on the Dow are alarming for this is warning that what the majority expect, may not be the outcome as usual. The 500 point decline in the Dow should get everyone calling for 1929 once again. This is not going to be so easy this time. We have to play this by the numbers – no emotional fits.