You wake up Wednesday morning checking your smartphone to see whether the storm has ended after two crazy days on Wall Street and rest of the world were volatility reached its climax since 2008 crisis, and you find out markets are under control with Chinese stocks back into positive territory, Europe futures gaining, currency markets steady and dollar back into control. Well done PBOC!
Not much longer, Shanghai Composite back into negative territory, Dax opens below 10,000 physiological level, and bond yields fall in Europe. Same scenario we saw yesterday in Wall Street yesterday as Dow Jones enjoyed a 3% rally, supposed to be the biggest in 2015 to wipe out all gains and drop further 1.29% in final hour of trading. Clearly indicates game is not over yet, and traders thumbs down to PBOC.
Currencies were not better off, with safe havens JPY, CHF leading the rally along with the EUR. Why the EUR? Yes, it is not safe haven and yes, ECB was the latest to consider a QE program which not likely to end before Sep 2016. There is two major reasons for the EUR rally against the USD. As the Euro became a carry trade currency “a funding currency for traders”, on risk events, traders tend to sell their investments and covert it back to Euros. The other main reason is investors pushed back their expectations for a Fed hike soon. The inverse correlation between EURUSD and European equities still holding tight, so as long equities continue to fall expect the Euro to hold onto its gains.
U.S. Durable Goods the Only Data Worth Watching
On the data front, we had no tier one economic data from Europe and trader will be looking to July’s US Durable Goods Orders. Last month U.S. durable goods, a gauge of U.S. business investments spending rebounded solidly, suggesting the drag on manufacturing from capital spending cuts retreated, however, the expectations for the month of July don’t seem very promising with a 0.4% drop for the headline and a 0.4% gain when Transports are detached. Although economic figures are no more in control of currency movements with the panicking current situation, at least it would provide an indication of how the Fed might move in soon.
Will the Fed do it again?
Elsewhere traders’ eyes will be on a scheduled speech from New York President William Dudley. Everybody is keen to know how strong the latest market turmoil and Chinese economy weakness will impact the Fed’s decision. Markets clearly wants the old friend support, the Fed who stood next to the markets since 2009 and again in 2013 when markets could not control the situation by itself. Lockhart was still confident the move will be in 2015 but didn’t mention the month September in Mondays speech, so let’s see what Dudley has for us.