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Markets are now looking at a downgrade of the US and evaluating the impact. Risk off was the big theme yesterday as the market is getting nervous about a possible US default as we still have no solution on the US deficit plan. What will happen if indeed a deficit plan is not agreed upon by the 2nd of August deadline? A week back everybody seemed to be taking for granted that a plan would be reached and we were testing the upper end of the recent range in the S&P500 futures at 1343. One week later we are at the opposite side of the table, testing the lower end of the last weeks’ range. This has pretty much been the story the last few months, swinging rapidly between hope and disaster. I just reiterate the comments I have made many times over the last months, the debt crisis will be with us for a long time, there is no quick fix. Even though we might solve the problem today, we are likely to have more problems down the road as countries like Greece, Portugal, Ireland and possibly more have to restructure their debt down the road as they cannot get funded in the regular market. It seems like the next on the list of failed states will be Cyprus, where the government resigned and seems like they need a bailout in the next weeks. Of course Cyprus is such a small state that the market impact will be very little I reckon.
S&P500 futures took a big hit and closing down by 26.75 points yesterday. The fact that we closed at the very lows on high volume indicates that we had a lot of selling yesterday and I think we go lower and at least test the 1290 now and a big risk that we will break even lower. Yesterday’s move lower confirms that we had another failure in the 1340 to 1362 resistance zone. That also indicates that we are likely to have more work to do on the downside. I mentioned last week that I was a bit concerned for more potential upside because of the lack of volume on the approach towards that 1340 to 1362 resistance zone. I said we need increasing volume on the up bars to be able to push through the resistance. In an up move, declining volume is bearish, in down move, is declining volume bullish.
Euro back down below 1.43 today after trading up to 1.4536 high yesterday. Aussie continues to do well as the market is looking for a possible rate hike in the RBA meeting next week, following high inflation data this week. I don’t think RBA will hike rates next week, but rather wait a bit. However it seems pretty certain the next move will be up and that is enough to support AUD as most other G-10 counterparts are not doing much on the interest rate side for the foreseeable future. That upside idea in NZD that I mentioned last week going into the RBNZ meeting worked out rather well as we have moved about 164 pips higher since I publish the idea on the 19th of July.
Crude broke below that 98.50 support yesterday following the DOE data, confirming a likely reversal lower. Indeed a bit later in the day, we took out the 97.50 support as well. That means the interim rising support from the June lows have now been broken. Next target to the down side is now 94.74, which is a key support level.
VIX broke above that key 22 resistance level and closing at 22.85, +2.62 points. That is a new 1 month high and also interim down trend from the March high is broken, which opens for a move to 25 level and higher. I view this is another confirmation that we are likely to continue the risk off mode.
My comment on the VIX from Tuesday: “Looking at the VIX index chart, we have a clear range last 3 months and it has worked very well to buy below 15.50 and sell towards 22. I still favor buying dips and I think we will see another spike towards 25 to 30 in the next 4 to 6 weeks. See chart below.”
However, I will keep a close eye on the news ticker as positive news out of US deficit negotiations can swing things around rather quickly. Especially given that we probably have quite a bit of shorts in the S&P 500 futures following yesterday’s heavy selling, meaning a short squeeze could make a rally even stronger.
Today’s calendar:
14.30 US initial jobless claims
16.00 US pending home sales
00.45 NZ building consents
01.01 UK GfK survey
01.15 Japan Manufacturing PMI
01.30 Japan CPI, unemployment
01.50 Japan industrial production
Looking at a few interesting points in the markets trading wise:
- S&P500 futures, I am looking for a test of 1290 support and likely break lower, following strong selling yesterday and another failure up in that 1340 to 1362.
- Corn bouncing higher after reaching my downside 670 target. Also hearing some traders buying bunch of puts for December with 500 strikes as cheap downside protection. I expect the upside to be limited for now and bearish below 696.
- Crude false break higher earlier in the week and breaking lower yesterday, looking for a test of 94.74
- Yen continues to be strong across the board no matter what the equity markets are doing, seems like the correlation between equities and JPY is out of the window for the time being. I still have a bias that JPY should sell off, but at the moment not happening. I think we could see BoJ on the bid if it goes towards 77, so keep an eye on that. The best way to play potential JPY I reckon is to buy some calls, I see that 9th Sep at the money options are only at 10.07% volatility. That looks interesting in my opinion as I think the volatility will rise from that level.
- Comment from earlier this week, spot on: GBPUSD has broken the recent downtrend and looking for a test of the key resistance at 1.6444 next, as long as 1.62 holds.
Technical’s and comments
Euro: Could not really get up to the 1.4577 resistance and stopped short at 1.4536 yesterday and back down below 1.43 at the time of writing (1.4290). Very choppy price action as the two currencies compete for the “least wanted spot among G-10”. Next key support is 1.4140.
Cable: It tested my upside target of 1.6440 to the pip basically reaching a high of 1.6440. Still bullish potential above 1.62 support holds.
USDJPY: JPY is performing strongly no matter what the equity markets are doing at the moment and no sell off of the JPY to really spot at the moment. I still think
JPY is very overvalued, but maybe not so much against EUR and USD. Alternative plays are AUD, CAD and NOK I think.
Swissy: Big down trend in this pair and no telling when it will end. My guess is that we will not seen any major reversal until the Fed starts tightening monetary policy. Risk off mode again this morning benefitting CHF and trading down to 0.7992 low so far. Minor resistance at 0.8092 that can be used to sell. Otherwise difficult to outline any levels other than the 0.80 as a key level in the current price region.
AUDUSD: Up and away, trading higher on CPI data yesterday and testing the 1.11 resistance, reaching high of 1.1080. Buy on dips for now, but would like to see a test of 1.08 before going long.
USDCAD: CAD performing strongly on the prospects of rising rates in Canada. However it has moved a fair deal to the downside and at this point I would like to see a pullback before looking to buy CAD.
S&P Future (ES): Big volume sell off yesterday, closing on the lows = bearish and I expect the bounces to be short lived until we have a solution on the US deficit negotiations. I mentioned last week and this week that a another failure in that 1340-1362 region should send us much lower. Next support is 1290.
Gold: 1628 high so far, the sky is the limit. The most important I reckon is the US 10 year rate, so keep an eye on that. Looks like buy on dips above 1580 for now. The big risk is if we get a debt ceiling deal in the US, could see strong profit taking.
Crude oil: False break above 100 level followed by a break down through the recent support at 97.50=bearish. Looking for a move lower towards 94.74 key support. Minor support at 96.96 and resistance at 98.98
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