Many Intertwined Influences Drive Equities, Gold And Oil Down While Dollar Rises On False Hopes Of Fed Rate Hike

We’d like to begin with Volkswagen’s suicidal attempt to skirt pollution sensors and controls on their automobiles, essentially creating a fraud that at some point may lead to criminal charges. That drove VW’s stock down almost 17% on the day and hammered other automotive stocks.

This is not the kind of news the industrial realm needed on top of more shaky news out of China, which seems headed for another manufacturing contraction (Caixin Flash Report due out Wednesday). That drove copper down close to its one-year lows, which led other base metals lower.

China is slowing on soft domestic demand, continued weakness in housing, tight credit, and poor worldwide demand for Chinese manufactures.

In fact, a commodities route is in full swing. Precious metals slipped today, gold off the least, although substantially; platinum is in disaster mode (off close to 4.00%), with silver right behind it, palladium faring a bit better.

When you look beyond financial products’ futures, all commodities are down, whether industrial or agricultural. (Only sugar is slightly up on temporal issues.)

We can safely say that the six-year super cycle in physical commodities is at an end and the downward trend may continue for some time. We’ve seen for some time now that oil is certainly stuck in a down cycle. It is off again today, this time by more than 3%. And there are many sober analysts thinking it could go another 30% lower.

Additionally, the S&P 500 is in the midst of testing its support (roughly 1939 to 1941) and it may crash through it unless some bargain hunters step in. The S&P is falling victim to margin call selling as are the other U.S. indices. It should also be noted that all ten sectors that make up the S&P are down.

In another sign that emerging economies are suffering even without a Federal Reserve rate hike, the Brazilian real fell to its lowest point ever against the strengthening U.S. dollar. (The sturdiness of the dollar has had a drastic effect on precious metals today.) Couple that with unsteadiness with other Asian-Pacific markets like Malaysia, Indonesia and Vietnam and we have more arguments against a Fed rate hike.

Many people – especially Americans – will stand up, salute the flag and say that the Federal Reserve is not supposed to be concerned with what happens in far-off places. Theoretically, that is true. However, in today’s ever-increasingly interdependent world, what the Fed does matters – a lot. What the European Central Bank does with rates matters as well, but not as much as what the U.S. does. The dollar is, for good or ill, the world’s reserve currency.

Maybe what we are looking at today is purely temporary, But right now, Chairwoman Yellen’s party of rate doves is looking more like a bench of wise owls.

Wishing you as always, good trading,