Brittle enthusiasm before the US growth data

Stocks Rally But Volatility here to Stay for now.
by Brenda Kelly

A certain amount of relief is being felt in commodity markets today. Having fallen to 16 year lows on the back of China concerns and an overbought dollar, the respite has come from a fairly dovish speech from the FOMC’s Dudley yesterday. Any indication that the FOMC will hold fire on momentary tightening will be taken as a boon for commodities but given that fundamentally little has changed, we can expect to see volatility continue. Even if the Fed leaves well enough alone next month, this will only ramp up expectations for a move in the subsequent months.

Money supply expansion continues in the wake of ECB QE with private sector loan growth in July showing solid improvement at +0.9% vs +0.2% in June.

ECB has launched a raft of different policy measures to get credit flowing again, most significantly a massive programme to buy more than one trillion euros ($1.1 trillion) worth of public sector bonds to pump liquidity into the system. This increase money supply coupled with the ECB’s Praet’s dovish tone yesterday could bode well for European stocks. Inflation expectations have taken a deep dive lower in recent months despite the moves from the central bank. The measures have finally started to bear fruit it would seem. Given that money supply can be considered a barometer for future inflation, the prospect of monetary easing until at least September 2016 would imply a degree of bullishness for European stocks.

European markets were already surging prior to the release of this data aided by an intervention by the PBOC shoring up stocks prior to the military parade next week. This may go down in history as one of the more indirectly expensive parades.

Despite a plethora of companies going ex-dividend today, the FTSE is romping higher led by Standard Chartered. Emerging market exposure has ground down shares in the bank over the past number of weeks. Given that the average price target is above the £10 marker, and the stock is currently trading at 750p you could say that bargain hunting amongst the financial sector stocks was inevitable. Same goes for the materials sector with BHP, Anglo American, Antofagasta and Rio all registering decent gains on the back of stabilising metal prices.

Chinese stocks gain as government steps
in by Ipek Ozkardeskaya

The risk sentiment seems improving yet the questions triggered by this week’s chaotic market action remain a barrier for a healthy setback. The volatility in Chinese stock markets remains high; Shanghai’s Composite closed 5.34% higher after having lost 24% over the past five trading sessions. There are rumours that the government intervened to push the stock market higher before September 3rd military parade as monetary intervention failed to bring investors back on field.

The US and European equity futures are better bid, while sovereign bonds lack demand this Thursday.

Brittle enthusiasm before the US growth data
by Ipek Ozkardeskaya

The US durable goods rose 2% on month to July, hence positively surprised the market expecting a 0.4% drop in July. On yearly basis however, the contraction in US durable goods orders contracted by a hefty 20%, a quite large scale that we have not seen since 2009.

In the aftermath of yesterday’s US data, the expectation that the Fed will certainly refrain from hiking the federal fund) keeps the USD appetite limited. There is less than 30% chance of a September increase.

Due today, the US 2Q (second read) GDP growth is expected to be revised higher from 2.3% to 3.2%, while the core PCE could surprise on the upside.

The fact that the Chinese panic spilled over the US stocks has been an excellent warning that the improvement in the US data alone is not enough to justify a policy tightening from the world’s leading economy. Even encouraging US data should lack power to revive the Fed hawks. This could keep the Fed pressures off the risk assets at least until December or further. Yesterday, the US sovereigns priced in less than 50% chance for a Fed rate hike in 2015.

Delay in Fed action should cool off the anxiety in the market however, the burst in the stock bubble hints at more potential for further sell-off across the board. The stock markets have not found a bottom yet. The volatilities are expected to remain as investors filter the bubble effect to obtain fair valuation for the stock markets across the globe.

Carry traders step in
by Ipek Ozkardeskaya

The high-beta, high yield currencies are popular among traders, especially among those who have suffered heavy losses and hence are brave enough to take risk in an effort to recover damages.

Among the G10, the Antipodean could be good carry opportunities, funded by yen and euro. The oversold conditions in AUDJPY hints at a possibility for correction to 87.40, equivalent of 50% retracement on August unwind. AUDEUR is expected to refresh attempt to 0.6520 (former year low).

In the emerging complex, Turkish lira is a front-runner. EURTRY hit 200h MA (3.2890) with potential for deeper correction to 3.2500/2457 (38.2% retrace on Jul-Aug rally). USDTRY shortly traded below 2.90 mark in Istanbul.

As carry traders chase yields, the downside corrections are seen as good dip buying opportunities. The selling pressures in the lira will remain as the period before the re-election (Nov 1st) is expected to be a sanguine one.