As I published in our weekly “Signals” publication.

Labor Day used to mark the end of summer, the time kids went back to school, and when we welcomed cool, crisp autumn weather after months of heat and humidity. Well, Labor Day may mark the end of summer, but don’t expect it to signal the end of the heat of market volatility this year. We have been talking about it for months. Uncertainty drives fear and fear drives volatility. Uncertainty is so extreme at this point that market volatility is starting to feel normal.

China, the Fed, commodities, and equities are not only making the markets nervous, but these things are also starting to make the “ordinary” population nervous. Bill Gross, the PIMCO turned Janus management king, with close to $200 billion under management, was quoted last Wednesday when asked for his current view on the market,
“Cash or better yet ‘near cash’ such as 1-2 year corporate bonds are my best idea of appropriate risks/reward investments,” Gross said. “The reward is notmuch, but as Will Rogers once said during the Great Depression – “I’m not so much concerned about the return on my money as the return of my money.”
The statement from the bond king himself created a bit of a buzz in the financial world as many analysts are concerned that Gross is echoing the sediment of “ordinary” people and that the “market” will be hit further as “ordinary” people soon tire of volatility and ramp up redemptions in the markets and move away from risk.

To zero in on uncertainty, we need to keep beating the two dead horses that we have been talking about for months— China and if or when the U.S. Fed is going to increase rates.

While the world watched Greece back in June, we watched China and have not stopped. The world is still asking the question, is China in a recession? Is China heading for a recession? Uncertainty around the Chinese data again caused fear in the world markets, but the world was given some time to relax last week as the Chinese markets were closed on Thurs-day and Friday for their 70th anniversary parade and celebration of their “defeat” of “Japanese Aggression” (World War II).

Leading up to the parade, China grabbed headlines as they arrested short sellers, and brought in fund managers for “questioning” that have yet to be heard from or seen by their families. The actions of the government and the showing of mass military strength that was on display at the celebration parade would seem to be the actions of a government that is not afraid of western powers, but more so of an uprising of their own people. A not too far outlandish conclusion is that the Chinese government knows there are real domestic problems and by hiding behind “national pride”, the Communist Party is making Japanese people and stock market “manipulators” the scapegoats to calm citizens and keep any ideas of revolution firmly in check.

The strong anti-Japanese aggression is nothing new from China, but the two countries have very close ties and are large trading partners. Japan has its full debt crisis to worry about. The Japanese economy has been fighting stagflation, weakening GDP, mounting debt, and an aging population; an act of aggression, trading or otherwise, could be the preverbal straw that breaks the camel’s back in regards to Japan.

Since China took a two day national holiday, uncertainty was turned back to the Fed. The uncertainty has now swung from discussion about increasing rates in September, to starting another round of QE. The central problem however remains not the action, but the uncertainty of the action. As we said a few weeks ago, The Fed Can’t Win and until the market knows what the Fed is going to do; we are going to see continued volatility.

The market is still split on the Fed move that is now less than two weeks away. The release of the Fed’s Beige Book on Wednesday showed that the American economy is still plowing along, and the jobs data that was released was not bad or good, but does show that the American economy is still plowing along. The problem is not the data, but the uncertainty of the data. If we had great data, we would know the Fed was going to raise rates, and had the data been bad, we would have known that rates would not only stay at zero, but that we may also be looking at another round of QE. So the problem is not the numbers, but the uncertainty of what the Fed is going to do with the numbers.

It may be cooling down, but volatility is only starting to heat up. Is China heading for a hard landing? Is the Fed going to raise rates? Oh, yeah, and by the way, can Europe dig out of their hole, and could it take a straw to break the back of Japan? These questions and more are all pointing to a very hot autumn.
The above article is an excerpt from EQS Trading’s Weekly Publication on the Commodity Markets called “Signals” which we write and publish every Monday. EQS Trading also publishes a daily “Trade Signals” email that provides in-depth “short” and “long” recommendations and trade strategies for the commodity market with entry prices and stop loss levels.

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