Forex Market Commentary
The NFP data was that bad. Just a meager 160k jobs added to the economy for April 2016 compared to an expected figure of 200k. So why didn't the US equities market collapse? The immediate impact spooked traders so much that the SP500 actually fell below the 50 day moving average at then 2043 and hit a low of 2039.45 and in the process a lot of small traders got ready for the Armageddon that sensational journalism has warned for some time now. Well, Armageddon never quite came and instead, after an hour of silence, institutional traders poured back in to snap up any short and force the prospective bear to withdraw his claw as in an instant and pushed the SP500 up to 2057. many small traders got burned alive today trying to short the SP500 minis, the USDX and go overtly long gold.
So now let's dissect what's actually going on because if anything what was proved in today’s market action was the indisputable fact that institutional money has nowhere else to go.
Firstly, looking at a global macro perspective; commodity markets really haven’t got anywhere to go if the second biggest economy in the world, China, is stuttering. The recovery in Chinese equities flatters to deceive the reality. Caixin China reported a much weaker than expected manufacturing PMI reading of 49.4, which exhibits China’s manufacturing sector contracting for a 14 th consecutive month in April 2016. That’s an abysmal annualized 6.7% pace for Q1 16 which is a seven-year low. China 2015 grew at 6.9 and that already was the weakest rate of expansion in 25 years. So China is slowing down even more and the debt bubble at 237% GDP is ready to pop to create China Crisis Part 2. Weaker Chinese demand for commodities is yet to play out in full so be wary of gold and crude oil spikes and talks of flight to safety because the only real flights to safety in today's modern economy is the US Treasury.
Secondly, the global negative yield drive gives institutional investors nowhere to run but USD denominated equities and bonds. In 2012 Denmark started the ball rolling with negative yields. The ECB has universally adopted this policy since 2014 in the attempt to weaken the euro currency to stimulate exports. Therefore any mover for EUR/USD to push to the 1.20 will seriously undermine European exports and push the ECB to sell Euros and buy Dollars. Similarly, in Japan negative yields have been adopted but with little success for instead of depreciating the Yen to encourage exports we have seen the appreciation of the Yen. In contrast fed Chair Yellen has stated for the record that the US would not adopt a policy of negative yields. Should the US 30 year bonds fall into negative yields then we would have a serious problem of global deflation on our hands since it is the US equities and bond markets that are propping up the entire global system from collapse. Friday’s NFP data now confirms that even a June 16 interest rate hike of 25 basis points is now under a 10% possibility and it is more likely that we will look to September 2016 once Q2 and Q3 have expanded the US economy.
Thirdly, US markets are still in a process of a healthy credit expansion which is fueling the SP500 share prices to drive to higher levels and the prime reason why today with the poor NFP data the market did not collapse. According to just a single state; the Federal Bank of St. Louis this week, just in this state alone, commercial bank credit overnight has increased year on from 11 billion Dollars to 12 billion Dollars with no signs of heating up the commercial lending sector in the state of St. Louis. That is a very significant reflection upon the entire US economy which has a large arsenal of Fred credit available to stimulate commercial banks to lend to the commercial sector without dipping into negative yields and promote economic growth and employment. Not China, not Japan, not Europe has this goldilocks equation between the central banking system, commercial banks and business within the framework of a positive yield climate.
Our conclusion is that negative yields is not working in japan and Europe and should China fall into this yield trap then the entire global financial system will depend even more on the US Fed to carry the sins of a global economy.
Please turn to Bloomberg - global bond yields
http://www.bloomberg.com/markets/rates-bonds
10 year government bond yields show US Treasury at 1.78% compared to - 0.13% for Japan and + 0.145 for Germany. it is because what is going on in the global bonds markets that the USDX remains in the 93 region no matter how much speculators tried to push the USDX down and drive up gold last 4 weeks, even the speculators can't hide the indisputable fact that if the Dollar drops global money would buy into the drop instantly to buy USA Treasuries and make an instant arbitrage
You cannot keep throwing spec money against fundamental economic principles that global fund managers will buy dollars at every dip to buy US bonds and equities and for this reason alone the SP500 did not crash as the sensational journalists cried for in encouraging small traders to short US equities. Any crisis in the world there is no market as large enough as the US treasury market. Gold just pales into insignificance in comparison. Given the poor showing of the US economy for Q1 16 how will international fund managers react when the US economy really starts expanding again in Q2 and Q3 when summer comes?
In my global macro analysis the major barometers I am look at for 2016 are as follows:
US Dollar - 93.809 +0.048 +0.06% - the global base currency. Global demand for US equities and fixed income products keeps Dollar bid at every dip. Large bank bids at the 92 are insurmountable for fast arbitrage plays.
So now let's dissect what's actually going on because if anything what was proved in today’s market action was the indisputable fact that institutional money has nowhere else to go.
Firstly, looking at a global macro perspective; commodity markets really haven’t got anywhere to go if the second biggest economy in the world, China, is stuttering. The recovery in Chinese equities flatters to deceive the reality. Caixin China reported a much weaker than expected manufacturing PMI reading of 49.4, which exhibits China’s manufacturing sector contracting for a 14 th consecutive month in April 2016. That’s an abysmal annualized 6.7% pace for Q1 16 which is a seven-year low. China 2015 grew at 6.9 and that already was the weakest rate of expansion in 25 years. So China is slowing down even more and the debt bubble at 237% GDP is ready to pop to create China Crisis Part 2. Weaker Chinese demand for commodities is yet to play out in full so be wary of gold and crude oil spikes and talks of flight to safety because the only real flights to safety in today's modern economy is the US Treasury.
Secondly, the global negative yield drive gives institutional investors nowhere to run but USD denominated equities and bonds. In 2012 Denmark started the ball rolling with negative yields. The ECB has universally adopted this policy since 2014 in the attempt to weaken the euro currency to stimulate exports. Therefore any mover for EUR/USD to push to the 1.20 will seriously undermine European exports and push the ECB to sell Euros and buy Dollars. Similarly, in Japan negative yields have been adopted but with little success for instead of depreciating the Yen to encourage exports we have seen the appreciation of the Yen. In contrast fed Chair Yellen has stated for the record that the US would not adopt a policy of negative yields. Should the US 30 year bonds fall into negative yields then we would have a serious problem of global deflation on our hands since it is the US equities and bond markets that are propping up the entire global system from collapse. Friday’s NFP data now confirms that even a June 16 interest rate hike of 25 basis points is now under a 10% possibility and it is more likely that we will look to September 2016 once Q2 and Q3 have expanded the US economy.
Thirdly, US markets are still in a process of a healthy credit expansion which is fueling the SP500 share prices to drive to higher levels and the prime reason why today with the poor NFP data the market did not collapse. According to just a single state; the Federal Bank of St. Louis this week, just in this state alone, commercial bank credit overnight has increased year on from 11 billion Dollars to 12 billion Dollars with no signs of heating up the commercial lending sector in the state of St. Louis. That is a very significant reflection upon the entire US economy which has a large arsenal of Fred credit available to stimulate commercial banks to lend to the commercial sector without dipping into negative yields and promote economic growth and employment. Not China, not Japan, not Europe has this goldilocks equation between the central banking system, commercial banks and business within the framework of a positive yield climate.
Our conclusion is that negative yields is not working in japan and Europe and should China fall into this yield trap then the entire global financial system will depend even more on the US Fed to carry the sins of a global economy.
Please turn to Bloomberg - global bond yields
http://www.bloomberg.com/markets/rates-bonds
10 year government bond yields show US Treasury at 1.78% compared to - 0.13% for Japan and + 0.145 for Germany. it is because what is going on in the global bonds markets that the USDX remains in the 93 region no matter how much speculators tried to push the USDX down and drive up gold last 4 weeks, even the speculators can't hide the indisputable fact that if the Dollar drops global money would buy into the drop instantly to buy USA Treasuries and make an instant arbitrage
You cannot keep throwing spec money against fundamental economic principles that global fund managers will buy dollars at every dip to buy US bonds and equities and for this reason alone the SP500 did not crash as the sensational journalists cried for in encouraging small traders to short US equities. Any crisis in the world there is no market as large enough as the US treasury market. Gold just pales into insignificance in comparison. Given the poor showing of the US economy for Q1 16 how will international fund managers react when the US economy really starts expanding again in Q2 and Q3 when summer comes?
In my global macro analysis the major barometers I am look at for 2016 are as follows:
US Dollar - 93.809 +0.048 +0.06% - the global base currency. Global demand for US equities and fixed income products keeps Dollar bid at every dip. Large bank bids at the 92 are insurmountable for fast arbitrage plays.
EUR/USD - 1.1408 0.0000 0.00% - the 2nd liquid currency. expect the ECB to become an active seller of Euroes for any increment above 1.15 and so a smart trader would short the spikes. Shorts in play at 1.15.
GBP/USD British Pound 1.44305 -0.00060 -0.04% - the 3rd liquid currency. GBP is fast becoming a bright prospect for 2016 and beyond. GBP is doing well, the mayorial race is over, Brexit seems to be a stretch of the imagination and institutional money is pouring back. I am neutral but looking at shorts near the 1.50 mark.
30 DAY FED FUND May 99.6375 0.000 0.00% the basis for US rates. Traders are neutral now in view of the NFP data.
Dow 17740.63 +79.92 +0.45% the body for US equities. large money came in right at the moment anything could have happened. Today will certainly set the tone for the rest of the year. Bids in play at any dip.
SP 500 2065.30 -10.51 -0.51% the core engine for US equities. today was the real game changer where we really saw the claws of the bear in one frightening moment and the bear got pushed back. We were that close to a rout for a moment that could have triggered a global financial collapse that few people realize. However, the risk to reward relationship is getting smaller. A push to the 2100 seems very hard but achievable eventually once the grinding action up begins again relentlessly.
VIX 15.75 - 0.98 - 5.83% - the volatility of US stock options. the VIX went up to 16 last week but has retraced. has the scare of an equities collapse run it's course? Today was the game changer flashpoint that drove the bears back. Forward volatility seems to show that equities prices will stabilize and consolidate in a narrow channel for the remainder of Q2 around the 50 day moving average of the SP500 at 2045.
Crude Oil WTI - 44.62 +0.30 +0.67%- a barometer of world trade. This week it was the Canadian fires that followed Texas floods, Kuwaiti oil production strikes and a Russian - Saudi cooperation. but still US date shows record stockpiles and China is counting a sea full of laden ships to come in and offload. Take away the last 3 weeks of bullish news and there's actually nothing left to hold oil up but empty air. Over-whelmingly short the spikes.
Gold - 1288.020 +11.335 +0.89% - a hedge against inflation. Gold is the market that everyone seems to think is a massive haven for safety when it is actually the most opaque market with high costs of storage and haircuts for withdrawals in bullion and thus it's not the prime area for safety in numbers. Global production and demand doesn't justify the spike. Nevertheless the mini futures are very popular and everyone piled in and drove the market up 21 points at one point hoping that US equities will collapse the USD. Nothing could be further from the truth. Once again I am short bullion and US gold equities overwhelmingly at the 1300 because a sustained drive to the 1300 lacks economic fundamentals to support.
Always use your own better judgment before listening to sensationalist journalism. Today is a prime illustration of how global fund managers think in terms of global interest rates before determining the value of a currency in the search for superior bond and equities yield.
Gold - 1288.020 +11.335 +0.89% - a hedge against inflation. Gold is the market that everyone seems to think is a massive haven for safety when it is actually the most opaque market with high costs of storage and haircuts for withdrawals in bullion and thus it's not the prime area for safety in numbers. Global production and demand doesn't justify the spike. Nevertheless the mini futures are very popular and everyone piled in and drove the market up 21 points at one point hoping that US equities will collapse the USD. Nothing could be further from the truth. Once again I am short bullion and US gold equities overwhelmingly at the 1300 because a sustained drive to the 1300 lacks economic fundamentals to support.
Always use your own better judgment before listening to sensationalist journalism. Today is a prime illustration of how global fund managers think in terms of global interest rates before determining the value of a currency in the search for superior bond and equities yield.
Pieter Bergli - Trader X16
A non-profit service for free education on in the forex markets
Disclaimer - U.S. Government Required Disclaimer - Commodity Futures Trading Commission
Futures and Options trading involves risks of losses. No representation is being made that any reader and account will or is likely to achieve profits or losses similar to those that are being discussed on this blog http://forexeducationperspective.blogspot.com/. The past performance of any trading system or methodology discussed is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
All trades, patterns, charts, systems, etc., discussed in this blog http://forexeducationperspective.blogspot.com/ are for educative and illustrative purposes only and not to be construed as specific advisory recommendations for actual trades. Disclaimer - http://forexeducationperspective.blogspot.com/ bears no responsibility for the trading actions of its readers.
* European Union laws require European Union visitors to this blog to know that cookies are used by Blogger and Google, including use of Google Analytics and AdSense cookies and in reading material from this blog do consent to the use of such cookies
