As I published in our weekly “Signals” publication.
What a week for the books! To say last week was historic is an understatement. Monday morning started with #BlackMonday as equitiy traders and the bots drove the Dow down over 1,000 points at the open, only to rally back during the day and eventually lose it again, closing down 588 points. Overnight, the Chinese government lowered rates and reserve requirements which rallied the equities market only to be squashed again at the bell, setting up the 6th down day in a row for the Dow Jones Industrial Average.
The world was magically saved on Wednesday as the Dow flew up 609 points, with the rally continuing to finish out the week as the Chinese were up to more tricks on Thursday when their government starting buying shares of large Chinese corporations. The market whiplash spilled over to the commodities market as oil and products took a beating, with WTI falling below $38. Then on Thursday, oil made a historic rebound and rose over 10% in one day!
The Wild, Wild West? More like the Wild, Wild Far East!. We have been talking about China for months (see our June Newsletter “EQS Continues to Watch China as the World Watches Greece”), but it is not just China, it is Japan, and it spills over into all of Asia, and then there are those caught between the Mid-East and Russia that are feeling the pain from low oil. The world is not healthy and the fear of what is coming is driving volatility.
Due to the turmoil, the market now thinks that a September rate hike is off the table. We wrote about the Chinese Bag of Tricks on August 17th, but not to be outdone by the magic of our communist friends the Fed revised American Q2 GDP up on Thursday.
The Bureau of Economic Analysis (BEA) reported that “The GDP estimate released today is based on more complete source data than was available for the ‘advance’ estimate issued last month. In the advance estimate, the increase in real GDP was 2.3 percent.
With the second estimate for the second quarter, nonresidential fixed investment and private inventory investment increased. With the advance estimate, both of these components were estimated to have slightly decreased.”
With the revision of the GDP and the strange behavior in the value of the dollar, the gold market, and the oil market we think that traders should pause and consider that a rate hike may not be off the table. The growth of GDP was fueled by autos and housing, both things that would likely cool with a rate hike.
The BEA went on to report that economy was growing at a 3.70% annualized rate, up +1.38% from their previous estimate and up +3.06% from the first quarter. This report included significant upward revisions to the growth rate contributions from commercial fixed investment (revised upward +0.52%), inventories (up +0.30%) and government spending (up +0.33%). Consumer spending was revised upward a more modest +0.13%, and the net impact of exports and imports was also revised upward +0.10%.
We have been looking for clues from Yellen on when liftoff is going to occur, and as we reported on August 24th, we are getting mixed messages from members of the Fed Board that are talking to the media and giving speeches. The mixed message from the Fed is concerning, but reading between the lines it would seem that the Fed wants to find a way to raise rates, and traders want to make sure that the Fed kicks the can down the road.
Fear makes for irrational decisions and as news is reported that lowers the probability of a rate hike, equities rise and oil rallies, which takes money back out of the pockets of Chinese, Japanese, and American consumers, and into the pockets of producers. Back on July 27th, we asked the question, “Are Commodities Pointing to a Global Recession?,” and the answer for emerging markets is “yes”, and for developed markets is “maybe not” as consumption of cheap commodities is a good thing. Another way to slice it is those countries that depend on exporting commodities as a source of revenue are negatively impacted and those that consume commodities will benefit.
An increase in the Fed funds rate is not the medicine that is needed to stop the spread of recession flu. After reflecting on the true turmoil of last week’s market, it was not the volatility and wild swings in prices that is concerning, it is that the case to raise the Fed funds rate increase did not weaken. The Wild, Wild West is here and now, and the gun battle is about to be taken to the street for a draw at high noon.
“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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