China cuts rates, Bonds break, Equities rally, Dollar rallies off of lows

Financials: Sept. Bonds are currently 117 lower at 159’12, 10 Yr. Notes 19 lower at 128’20 and 5 Yr. Notes 9 lower at 120’15. 10 Yr. German Bunds are 154 lower at 154.14. Yesterday’s equitiy rout saw sharply increased volatility in equities and treasuries as a slow down in China’s economy infected Global markets causing Bonds to rally nearly 3’00 early in the session in a “flight to safety” before cooler heads prevailed. Bonds eventually traded lower midsession and closed slightly higher. The long 5Yr./short 10 Yr. spread held about steady most of the session losing only a few ticks. The ratio (yield curve spread) spread of long 5-5 Yr. notes/short 3-10 Yr. Spread has actually worked in our favor. We continue to hold these positions and will roll into the Dec. contracts by the end of the week. Given the drop in the equity markets and the cut in rates in China has many market participants scratching their heads and wondering if this will cause the Fed to reconsider a rate hike later this year. I still feel that a hike in short term rates is imminent.

Grains: Dec. Corn is currently 5’2 higher at 385’6. Nov. Beans 13’4 higher at 887’4 and Dec. Wheat 6’4 higher at 514’4. Corn gave us the opportunity to go long in the 360’-375’0 area (see “Report” 8/20) and try the long side of the Beans. Either take profits in Corn or use a protective sell stopat 377’0. If you went long Beans either take profits or use a ptrotective sell stop at 877’0. A lot has been written over the last few days about the various commodity index’s making a 16 year low and we cannot argue with this observation. That being said, I want to point out that for the most part these indices are waited heavily with energy prices in some cases crude oil making up 50-60% of the index. Being somewhat of a contrarian I like the fact that there is so much written as these commodities (especially grains) are making lows and am willing to fade convential wisdom and trade the long side.

Cattle: Dec. LC is currently 85 higher at 145.22 and Feeder Cattle about 200 higher in Sept. and Oct. contracts. As mentioned last week my bias is no longer negative and I’m willing to trade the LC frrom the long side below the 146.50 level on Dec. Cattle. For the moment I will be using a sell stop just below the 143.50 level for protection.

Silver: Sept. Silver is currently 2 cents lower at 14.74 and Dec. Gold 6.50 lower at 1147.00. We remain long Silver and will roll into Dec. contracts today and tomorrow.

S&P's: Dec. S&P’s are currently 73.00 higher at 1944.00. We are taking profits on the combination trades of short futures/short put positions. Given the high volatility I am not recommending position trades at this time but will be a buyer below 1390.00 and a seller above 1945.00 for short term trades. In my haste I originall wrote that I would be a buying in S&P’s below the 1390.00, it should say below c1890.00.

Currencies: As of this cwriting the Sept. Euro is currently 136 lower at 1.1465, the Yen 100 lower 0.8350 and the Pound 5 higher 1.5778. We took a loss on a short position in Euro froim above the 1.1400 level as the market rallied sharply early in the session on Monday as traders sold dollars pushing the Euro as high as 1.1718 which I’m guessing will now be the benchmark for resistance. Yesterday the Pound reached my upside target above the 1.5800 level and now recommend taking profits of long biased positions.