Aversion to risk is never a healthy thing for stocks and the degree to which aversion is rising is evidenced by the spread of the sell off as it has seeped into emerging markets in a very aggressive way since the middle of May. This is simply evidence of the extent that the entire planet, stocks, bonds, high yield plays, currencies bets, carry trade, emerging market stocks and so on are wedded to the free money and quantitative easing that the Fed and other central banks have been injecting into the market.
So wedded that it’s the mere threat to stop refilling the punch bowl let alone taking it away that has rattled investors all over the world. But then it makes sense, there is little doubt that the Fed and the growth of its balance sheet that has been the primary driver of the stocks over the past few years.
As momentum built in April and May and as Abenomics was flooding the global economy with more cheap money the Fed has clearly made the decision that enough is enough and the cure of the GFC economic weakness disease should not include a new stock market bubble.
We’ll know more next week but in the mean time we have a bit of a vacuum where fear is trumping hope and stocks are under pressure.
Last night stocks were down from the get go in the US and just kept heading south. At the close the Dow was down 127 points and back below 15,000 at 14995. The Nasdaq was 1.08% lower and the S&P is once again closing in on critical support falling 13 points or 0.81% to 1613 and US 10 years made a new 12 month high as the sell off continues.
The trend line comes in tonight at 1607 in terms of the pricing on my VantageFX MT4 platform which is the level to watch. Notwithstanding the fact I respect trend lines until they break my process suggests a break of the line.
In Europe it was the weakness in the US that dragged stocks lower with the FTSE down 0.65%, the DAX off 0.97%, the CAC off 0.43% and stocks in Milan off 1.61%. Somehow stocks in Spain rose 0.43%.
On FX markets the US dollar remains under pressure and while the yen’s resurgence makes sense from where I sit both fundamentally and technically the euro’s rally is harder to fathom, but it just keeps on keeping on trading up to a high of 1.3359 overnight and it sits at 1.3338 as I write. GBP was also a little higher at 1.5678 and USDJPY continues to sell off within a wild range trading 95.13-97.02 in the past 24 hours and rests at 95.93 this morning.
The Aussie dollar had a wild ride as well trading down to 0.9413 yesterday around lunch time before rallying strongly as Europe entered the fray yesterday afternoon/evening before making a high of 0.9563 before the sellers entered driving it back to 0.9470 this morning. The Aussie is trying to base but remains under pressure.
Interesting night for commodities and I confess to not really being able to put the moves in context except to say that they were a result of a weaker US dollar. Indeed there was a huge and unexpected build in crude stocks in the US overnight but Nymex crude still managed to finish up 0.40% to $95.76 a Bbl. Gold was up 1.07% at $1388 Oz, silver was up 0.70% and Dr Copper was 1% higher. Interesting night.
Data
The US finally joins the fray tonight with jobless claims, retail sales, business inventories and export and import prices. But before that we see the release of the extremely volatile employment data in Australia with the punditry expecting a rise of 10,000 but the NAB business survey amongst others suggesting that the number might undershoot.
Twitter: Greg McKenna