Dow reversals suggest more volatility is coming to markets

Quick Recap

This is getting interesting.

Yesterday we saw the Chinese seemingly abandon their efforts to prop up the market as just too hard. That saw Chinese stocks tank again with the index down below 3,000 for the first time since December 2012.

But, it didn’t hurt the rest of Asia, except Japan grappling with a stronger yen, and then Europe took the baton and ran with the rally. Traders in Europe were helped by the announcement, in that time zone, of the Chinese reserve ratio (RRR) cut to 18.0% and lending rate drop to 4.6%. That saw rallies across the big stock markets of 3, 4, and 5%.

It also helped the US markets kick off with a bang. The Dow and S&P 500 were up 2% early with the Nasdaq 3% higher. But, in a solid sign that traders are either not convinced that the Chinese move makes any difference, or that the Fed is still going to hike, the sellers re-entered the fray and all three indices ended in the red.

That’s the very definition of a dead cat bounce. It also complicates trade in Asia and Australia today. Traders will no doubt be conflicted on which direction to take. last night the SPI 200 futures were up at 5,254 at one point before closing down 47 points at 5080 this morning.

So we could see more pressure on the market.

I think it might be worth repeating what I wrote at Business Insider this morning:

Yesterday’s bounce in stocks across the globe, in the US dollar, in commodities, and increase in bonds was a classic trading reaction to a market that had become acutely oversold. The rally was however, and remains, unlikely to be the end of the moves lower. That is because what has occurred over the past few weeks appears to be that traders have recognised the game might be up for central bank omnipotence. That means, in the words of Michael Covel, they can’t ‘goose’ stocks higher anymore. That’s a new paradigm for investors used to the ease with which they could simply buy the index and watch stocks go up in the post GFC, QE world. So, as both Gerard Minack and David Rosenberg pointed out within 24 hours of each other, life just got harder for lazy investors.

It’s a traders market folks…happy days.

The overnight scoreboard (8.32am AEST):

Dow Jones -1.29% to 15,666
Nasdaq -0.44% to 4,506
S&P 500 -1.35% to 1,867
London (FTSE 100) +3.09% to 6,081
Frankfurt (DAX) +4.97% to 10,128
Tokyo (Nikkei) -3.98% to 17,806
Shanghai (composite) -7.63% to 2,965
Hong Kong (Hang Seng) +0.72% to 21,404
ASX Futures overnight (SPI September) -47 points at 5,080
AUDUSD: 0.7133
EURUSD: 1.1529
USDJPY: 119.01
GBPUSD: 1.5692
USDCAD: 1.3322
Nymex Crude (front contract): $39.60
Copper (US front contract): $2.3060
Gold: $1,140
Dalian Iron Ore (September): 435 (it’s denominated in CNY, folks)

On the day

On the data front today, we have construction work done for the second quarter. That’s the first of the partials being released for the GDP numbers coming in early September. Kiwi trade is also out and we have Glenn Stevens speaking. But so close to Tuesday’s RBA meeting, he’ll likely try to be circumspect. Durable goods are the highlight tonight and the Fed’s Jackson Hole symposium kicks off.

CHART OF THE DAY: Euro

I’ve done stocks to death recently but Euro has been really interesting as well.

Euro has broken up and through the top of the old wedge and then found support at this level again overnight. It looks a little overdone short term and while the 1.17ish high holds it probably needs to pullback.

What’s going to be interesting, worth watching is how strong support will be.

My sense – a bit stronger than many expect.