Market Talk – August 24, 2015

Trading Community

“Wild” is an understatement to describe today’s equity market moves. Some say the Chinese are at fault for their unexpected move in currency, but whatever the reason for the increased volatility, you can be sure they will increase margin requirements, which will add to the volatility and further the decline in liquidity.

All Asian equity indices were lowered around 5%, but the Shanghai lost 8.5% on the day. European core markets were also down around the 5% mark with DOW futures already down over 350 points before markets even opened on the floor. The DOW saw its worst opening in years, losing 1000 points in frantic trading.

As always, the flight to quality was into the bond market which saw US 10yr notes trade close to 1.92%. In Europe, the bund market was favored and peripherals lost between 10-15bp at 10yrs. The US/RX 10yr spread traded down to +140bp at best, but was quoted +143bp by the close. This is obviously completing the bubble we need in government for the ECM turn.

Oil suffered yet again (closing down 5.5% and 6.3% TWI/Brent respectively) the Russian rouble really did not stand a chance and closed down 3%. Other emerging market currencies also suffered to the US$ with TRY (Turkish Lira) down 2%, the NZ -3%, INR down 1.25% and AUD -2.2%.

The euro, Sterling, CHF (Swiss Fr.) and JPY all gained ground against the USD (which pushed the DXY to 93.40 -1.6%). This is the capital contract required for the flight to quality bubble.

Gold did benefit, but not as much as many dealers had expected. Closing $6 lower at $1154, it lost 0.45% on the day. However, when you look at the losses in silver (-3.75%) and copper (-2.5%) a small 0.45% is actually not that bad. Still, the lack of a flight to gold is in line with our models for the peak in government, so we are not dealing with a decline in confidence within government, which is the criteria for gold to rise.

The dealers are running very few positions. They insist on taking/working orders rather than putting the balance sheet on the line for what could be offside before they put the phone down. Boards and Risk Departments in banks, trading houses, insurance companies, GAM’s (Global Asset Managers), and pension funds are all in for a late night and expecting a week that is already being written into the history books of the “Week That Was”.