What China rate cuts and a V bottom mean for trading
Just as traders have received a clear reminder of what a major correction looks like for the first time in four years, today, we’re getting a reminder of what a V bottom looks like.
The pendulum which had swung in favour of defensive plays over the last several sessions has abruptly and clearly now swung back the other way. Defensive havens like JPY and gold have been falling overnight while stocks and commodities are bouncing back strongly with many US, European and Asia Pacific indices plus crude oil posting 3-5% gains.
These big reversals today building on yesterday’s initial moves confirm that yesterday’s early moves were buying or selling climaxes (depending on the market) that flushed out all of the weak hands enabling markets to rebound.
This suggests that the 2015 lows for many stock markets may now be in place. Although higher than usual intraday volatility may continue to create trading opportunities over the next several sessions, in the coming weeks, we may see indices continue to rebound overall out of very oversold conditions. That being said, we are still in the historically weakest time of the year for stocks, and it remains possible that we could get a retest of the lows toward October, but they seem likely to hold at this point.
In currency trading today, resource currencies that had become very depressed lately are leading the rebound, particularly AUD and CAD, capitalizing on rebounds in copper and crude oil. USD is also on the rebound as traders speculate that an end to the selloff for now and a rebound in commodities reducing deflation risks could keep the Fed on track toward a rate hike this year as Atlanta Fed President Lockhart indicated he still supports yesterday. In particular USD is gaining on EUR and other continental currencies like CHF reversing the trend of recent days.
China’s markets remain volatile and could be again later today as there have been a number of moves announced overnight in China and this morning here which have been helping to keep the party going in North America and Europe. The PBOC announced more monetary support today cutting bank reserve requirements plus lending and deposit rates. There also has been a cut to the stamp tax on trading.
There have also been reports that the China Securities Regulatory Commission is ending its efforts to support markets. This could be seen as a positive as the measures previously undertaken appear to have done more to prolong and deepen the crisis and undermine confidence than to shore up sustainable support.
Best Buy $0.49 vs street $0.34
Significant announcements released overnight include:
People’s Bank of China cut bank reserve requirements by 0.50% to 18.00%
People’s Bank of China cut lending and deposit rates by 0.25%
Germany Q2 GDP update 1.6% as expected
Germany IFO bus climate 107.7 vs street 107.6
Germany IFO current assessmt 114.8 vs street 113.9
Germany IFO expectations 102.2 vs street 102.0
Poland unemployment rate 10.1% as expected
Upcoming significant announcements include:
9:00 am EDT US FHFA house price index street 0.4%
9:45 am EDT US flash service PMI street 55.1
10:00 am EDT US CBO budget and economic outlook
10:00 am EDT US new home sales street 510K
10:00 am EDT US consumer confidence street 93.4
10:00 am EDT US Richmond Fed street 10 vs previous 13
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