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Trading Diary (August 18, 2009) --- Storm Won’t Pass Quickly
X-asset markets and Macro headlines
A nasty day for global equity markets as the ninth day of blood-letting in Chinese shares spilled red over everywhere, with many surprised that it took this long. Why the Chinese weakness --- Some point to the technical damage done last week, others to the continued weakness in Chinese FDI, others still to that basic law of physics: gravity. Regardless of the reason though, the impact of the selloff was felt everywhere and FX was no exception with USD and JPY were bid as commonly heard worries suddenly took on more significance.
Overnight, US data provided a little sunshine – better Empire manufacturing and better TIC data – but the clouds were just too thick. Headline wise, flagging Chinese demand, a still weak and newly frugal US consumer, commercial real estate, the dwindling effects of stimulus, etc – not new, but suddenly topical. That said, the closes are ugly everywhere: EUR, GBP and the VIX through their respective 55 DMAV. I think the close above in the VIX (27.89, +14.92%) is particularly notable as all other bouts of risk aversion on the move off the 666 SPX lows have been capped by the inability of implied to break out. Those who have bought dips this summer have been rewarded, but there is good reason to think that this storm won’t pass so quickly.
Looking through x-asset markets, I think there are ominous warning signs ignored by the equity complex --- 1) USD (which trades more on a risk aversion/risk seeking basis) is not following through to the downside; 2) UST yields are falling not rising as they did when they were leading stocks higher; 3) IG corporate spreads are cracking; 4) 30yr swap spreads which were at -60 bps the March stock lows hit flat last week but have returned to near -20; 5) The new leading global bourse - SHCOMP - has plummeted near 18% from the August high. Thus it is NOT surprising that S&P are struggling at the 38.2% Fibo retracement of 2007 high to 2009 low at 1015, while the NASDAQ 100 is SIMILIARITY struggling with its 50% Fibo at 1630.
Hong Kong China News
SHCOMP index has corrected 18% from the peak & retraced 38.2% from Dec 2008 up leg. Index should track US weakness and commodities weakness overnight to open down. However, I expect some sort of buying from bargain hunters as 2-3% downward move would mean 50% retracement from the Dec 2008 up leg.
In A share market, China Everbright Sec will start trading today, 601788CH. Macro wise, China reduced its holding on US debt to US$776.4bn in June from May's $801.5bn, a 3.1% drop. Market wise, PingAn said to cap its stock investment at 10% for 2009, it has already invested ~ 9.4% in the 1H. Besides, it cut its fixed-income investment from 80.7% to 74.7% in the portfolio.
Overseas Markets Review
Carrying over from declines in China , equity broadly slumped with -3.1% in Japan , -2.5% in US, and -2.1% in EU. Globally, equities fell 2.5%—the largest single day decline since mid-April, more than removing prior August gains. Elsewhere, 1Mwti oil slipped another $0.76, closing at $66.75/bbl—down $3.85 over the past five days. The pull-back from risk supported USTs. 2yr yield decreased 4bp to 1.01% (last below 1% on July 24), and the 10yr yield dropped 10bp to 3.47%—a one-month low. Fittingly, USD and JPY both strengthened, rising 0.6% and 0.8%, respectively, on a TW basis. JPY closed at 94.6 (from 95.0 on Friday) while EUR closed at $1.406 (-1.5%).
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