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The ‘concern’ being priced into all markets is becoming starker and starker, and it is going to make the final three and a half months of trade very volatile.
The bond market is speculating that more stimulus is coming and it is almost chanting ‘more, more, more’ for liquidity. As an example, last night the US auctioned $15 billion worth four-week bills. It was covered at 9.47 times on every bid – the highest cover bid on record. The next closest was back in 2011 when the cover bid was 9.07 times. The average is 3.47 times.
The four-week bills were sold at an average of 0 basis points (bps) as the US refused to sell them at a negative rate, however the underlying spot market was trading at -2bps, so barring the clear arbitrage trade, that is a clear flight safety from bond traders.
The interbank market is also speculating that the market ‘concern’ will see stimulus being added. The EURBOR spot price is currently -4bps. If you look at the EURBOR futures contracts (specifically, the March 2016 contract) it is pricing in a rate of 6bps by this time.
This is clear speculation that the European Central Bank (ECB) is going to either increase stimulus into the market or will cut its negative rates even further. The deposit rate is already -25bps – could it be -50bps come March 2016?
The commodities market
Dr Copper is looking sick again – breaking to the downside of mini up channel from the end of August on Monday and seeing sustained selling since. China housing and growth concerns now being highlighted by the Fed, IMF and Asian development, will have copper testing the August lows very quickly. A breakdown here will see copper in no-mans-land and chasing 2009 lows.
Gold is the interesting commodity case with all the ‘concern’ in the market. USD rallying hard last night coupled with the reactions in the bond market explains why gold was left out in the cold.
But, having hit US$1170 an ounce at the peak of the all-out risk off trade seen in August, the breakdown in gold and the trading pattern since the Fed announcements show investors see safety and investment opportunities in the USD rather than just safety in the inert metal.
Equity volumes in China are falling off a cliff. China futures saw just over 16,000 contracts for September, compared to the average amount of contracts being done in March, April and May this year which was of 2 million.
US trading volumes are hovering below the 30-day moving average consistently this month. What is more ‘concerning’ is on the down days there is a real sense of a ‘buyer’s strike’. Conviction in the US equity markets is wavering and the solid up-side days are more due to short covering rather than medium- to long-term buying.
The ASX is also seeing volumes below the 30-day moving average, and it’s also seeing buyers strike on the down days and covering on the up days.
What’s intensifying the concern is the scrutiny that Australia is receiving on its attachment to China. The IMF and many investment houses see Australia being the most affected by a China slowdown, and its ability to withstand the current cycle is likely to be tested further in the coming weeks as scrutiny intensifies.
Ahead of the Australian open
We are calling the ASX down 61 points to 5042 as the market sets itself up for another test of the 5000 point mark. The Caixin Manufacturing data at 11.45am AEST will likely be another sign that the slowdown in China is becoming sustained. Expectations are for a figure of 47.5 – a solid contraction.
The counter to this figure would be a belief that the central government and People’s Bank of China (PBoC) will look to shore up the full year GDP figure before December 31 with manufacturing stimulus measures. That could see a stimulus markets rally in this afternoon’s trading session, but that would only be the case if the index is worse than expected.